Why Microsoft Stock Remains A Solid Buy After Its Mixed Earnings ...

31 Jan 2024

Forbes

BELLEVUE, WA - DECEMBER 3: Microsoft CEO Satya Nadella addresses shareholders during Microsoft ... [+] Shareholders Meeting December 3, 2014 in Bellevue, Washington. The meeting was the first for Nadella as CEO. (Photo by Stephen Brashear/Getty Images)

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Microsoft disappointed investors with its latest financial report. While revenues were stronger than expected, the software giant’s forecast for the current quarter fell short of Wall Street expectations. Microsoft stock fell more than 1% in morning trading on January 31.

Does this represent a buying opportunity? For investors who have the patience to wait until Microsoft monetizes its investments in Generative AI, analysts see considerable upside in the company’s stock.

Microsoft’s Q2 Performance And Prospects

Microsoft’s guidance for the current quarter fell short even as the company beat earnings expectations due to rapid growth in its Azure unit, according to CNBC. Results were also helped by Microsoft’s acquisition of video game publisher Activision Blizzard.

Here are the key numbers:

Q2 Revenue: $62.02 billion — up 17.6% from the year before and nearly $1 billion more than expected, according to CNBC. Q2 Earnings: $2.93 per share — up 32% and 15 cents higher than expected according to the London Stock Exchange Group consensus. Q2 Net income: $21.87 billion — up 33% from the year before, noted CNBC. Q2 Azure cloud revenue grew 30% — three percentage points faster than analysts’ estimates of 27%, according to the Wall Street Journal. Microsoft said “six percentage points of Azure’s growth came from AI demand. That doubled the amount AI contributed to Azure in the previous quarter,” noted the Journal. Q3 Revenue Forecast: $60.5 billion in the middle of the range — $430 million short of the LSEG consensus.

CEO Satya Nadella expressed pride in Microsoft’s artificial intelligence offerings. “We've moved from talking about AI to applying AI at scale,” Nadella said in a statement. “By infusing AI across every layer of our tech stack, we're winning new customers and helping drive new benefits and productivity gains across every sector.”

Will Microsoft Monetize Generative AI?

Microsoft remained vague about how much revenue it is generating as a result of its Generative AI products. The giant company provided suggestive data points, including the following:

Azure AI customers. Microsoft now has 53,000 of them, and one-third of them are new to the cloud computing platform in the past year, Nadella said on the company’s January 30 earnings call. He also said the number of commitments to spend in excess of $1 billion on Azure overall increased during the quarter. Chips and Copilot AI add-ons. Microsoft announced “custom cloud chips and started selling a $30 monthly Copilot AI add-on to Microsoft 365 productivity software bundles,” noted CNBC. Microsoft Copilots for business functions. Executives gushed about Microsoft copilots for software developers, sales representatives and customer service representatives. “Copilots have helped over 30,000 companies improve sales and customer service,” Nadella said. “The Copilot for Windows is already available on more than 75 million Windows 10 and 11 PCs,” according to Silicon Angle. Where Analysts See Microsoft Stock Going

Despite the stock’s mediocre response to Microsoft’s earnings report, analysts sounded bullish. Here are some examples:

Goldman Sachs: $450 a share price target. Goldman Sachs Managing Director Kash Rangan liked — among other positive factors — Microsoft’s Azure revenue growth and envisioned a “significant growth contribution from Gen-AI,” according to TipRanks. Jefferies: $465 a share price target. Jefferies analysts wrote in a note on Jan. 28. “We expect MSFT to execute well, driven by AI tailwinds and a stabilizing macro situation.” Wedbush: $475 price per share target. “Microsoft's fourth-quarter earnings confirm that the firm is on a straight path toward a possible $1 trillion opportunity in artificial intelligence,” Wedbush Securities' Dan Ives told Business Insider.

Another analyst was optimistic about Microsoft’s AI products. They are “significantly more advanced than what is available from their competitors,” Mark Moerdler of Bernstein told Dow Jones. “It’s not a marketing pitch; it’s proof points.”

Overall, analysts have more modest expectations. According to CNN, the median price target of 52 analysts is $430 per share — representing 6.7% upside.

It is not too late to buy Microsoft stock since analysts seem to expect the tech giant to exceed the low expectations set by the company for its current quarter.

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