Microsoft set for AI-powered revenue surge as stock pulls ahead

Microsoft (MSFT.O) is expected to report a 15.8 per cent jump in quarterly revenue, its best growth in nearly two years, as rising adoption of its products infused with generative AI fuels demand for its cloud services.

Thanks to its early lead in artificial intelligence, Microsoft is likely to cement its lead as the biggest company by market value this year. The software giant snagged the top spot on Friday, with a valuation of $3 trillion, toppling by a small margin Apple (AAPL.O), the most valuable company since 2011.

Results on Tuesday from Microsoft, which has committed to invest more than $10 billion in generative AI posterchild and ChatGPT maker OpenAI, will set the tone for expectations from AI this year, after investors poured billions of dollars into the technology in 2023.

Any boost to companies’ toplines will still be small for the next few months, analysts have said. Nevertheless, Wall Street will watch closely to see if these investments are starting to show returns.

“Gen AI has emerged as the top priority for (chief information officers) and Microsoft is uniquely well positioned, with the majority of CIOs expecting to use a Microsoft AI product in the next 12 months,” Morgan Stanley analyst Keith Weiss said in a note dated Jan. 11.

The Windows-maker over the last three months has widely rolled out its main AI tool – the $30-a-month “Copilot” for its Microsoft 365 service that can draft emails, make presentations and collate meeting highlights.

“We expect AI contribution to Azure growth to increase, with our checks pointing to strong demand for Azure AI services,” said Jefferies analyst Brent Thill in a research note.

“It’s worth highlighting that we expect the situation at OpenAI will have a minimal impact, if any, on Azure’s AI contribution in (the second quarter),” he said.

Growth in Microsoft’s cloud business is also picking up as customers buy computing power in anticipation of using its AI services. This has helped Azure win market share as it competes with Amazon.com’s (AMZN.O) AWS and Alphabet’s (GOOGL.O) Google Cloud.

Microsoft forecast 26 per cent to 27 per cent growth for Azure in the second quarter ended Dec. 31. Analysts from Visible Alpha expect Azure to grow 27.7 per cent.

“It’s too early to be modeling revenue contribution from GenAI before 2025 for any software company not named Microsoft,” said RBC Capital Markets analyst Rishi Jaluria.

Microsoft said in October it expects its December-quarter gross margin for the cloud business to be mostly flat from a year earlier as it spends to expand its AI infrastructure to meet growing demand. Second-quarter operating expenses are expected to surge the most in five quarters, according to LSEG.

A recovery in the personal computers market is expected to lift revenue growth in the company’s Windows and devices business to the most in four years.

For its Windows-based business segment, which includes its recent acquisition of gaming firm Activision, the company forecast second-quarter sales growth of about 16 per cent to 19 per cent. Last week, Microsoft said it would let go of 1,900 employees at Activision Blizzard and Xbox, representing about 8 per cent of the overall Microsoft Gaming division.

Microsoft’s shares climbed 57 per cent last year. Along with a rally in other tech stocks, including Alphabet and Nvidia (NVDA.O), Microsoft helped fuel a 24 per cent surge in the S&P 500 (.SPX) in 2023.