What Wall Street is saying about Microsoft ahead of earnings

Microsoft (MSFT) is scheduled to report results of the third quarter of its fiscal year 2024 after the market close on Thursday, April 25, with a conference call scheduled for 5:30 pm ET. What to watch for:

CLOUD: In its fiscal second quarter, the company reported Microsoft Cloud revenue of $33.7B, which it said was up 24% year-over-year.

“We’ve moved from talking about AI to applying AI at scale,” said Satya Nadella, chairman and CEO of Microsoft. “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.” Amy Hood, executive vice president and CFO of Microsoft, added: “Strong execution by our sales teams and partners drove Microsoft Cloud revenue to $33.7B, up 24% year-over-year.”

On the day after the company’s last report, Citi raised the firm’s price target on Microsoft to $480 from $470 and kept a Buy rating on the shares. Against a high bar, Microsoft delivered a “healthy” top and bottom line beat, continued stabilization in cloud business and further evidence of ramping generative artificial intelligence contribution, the firm told investors. Citi wouldn’t describe Q2 as a “breakout quarter,” but came away most impressed about the increasing profitability discipline that is being paired with ramping generative AI monetization.

More recently, Citi lowered the firm’s price target on Microsoft to $475 from $480 while keeping a Buy rating on the shares. The firm remains positive on Microsoft ahead of the fiscal Q3 results as its quarterly inputs point to strengthening Azure growth trends boosted again by artificial intelligence services, with solid CoPilot interest. A more positive PC backdrop against conservative guidance should yield room for upside across key performance indicators, Citi added. The firm adjusted estimates for some slight currency headwinds, but noted that its constant currency estimates rose slightly.

On March 31, Jefferies analyst Brent Thill raised the firm’s price target on Microsoft to $550 from $465 and kept a Buy rating on the shares, calling Microsoft the top artificial intelligence winner. Microsoft is the key beneficiary of generative AI, positioned to benefit from both infrastructure and “app angles opportunities, capturing the most of this transformational opportunity,” the analyst contends. In an “AI Deep Drive,” Jefferies recommends owning Microsoft and Amazon.com (AMZN) for the enterprise, Alphabet (GOOGL) and Meta Platforms (META) for the consumer, and Crowdstrike (CRWD) for security. “Investors should start positioning now,” the firm added.

AI UPTAKE: In February, Tom Dotan of The Wall Street Journal said that Microsoft’s new AI had been used by testers for over six months and the reviews were in, with many saying it did not live up to the price. Copilot, Microsoft’s AI assistant, is an upgrade that plugs into Word, Outlook, and Teams, using its technology to summarize emails, generate text, and create documents. So far, the software has many shortcomings, including Excel, PowerPoint, and its tendency to make mistakes, giving pause to many on whether $30 a head is worth the price, the report stated.

More recently, The Information’s Aaron Holmes reported that as many businesses remain cautious about spending on conversational artificial intelligence, AI providers such as Microsoft, OpenAI and Google (GOOGL) are racing to make the technology more of a must-have by introducing new features that can handle complex tasks with little guidance from the customer. Microsoft, for instance, is making software to automate multiple actions such as creating, sending and tracking a client invoice based on their order history or rewriting an application’s code in a different language and verifying that it works as intended, according to employees. The new software, which OpenAI technology will power, will improve upon Microsoft’s current suite of Copilots, the author says.

Earlier this month, Anissa Gardizy and Amir Efrati of The Information reported, citing three people involved in the matter, that Microsoft and OpenAI have been making plans for a data center project that would include a supercomputer with millions of specialized server chips to power OpenAI’s artificial intelligence. This “Stargate project” could cost up to $100B and Microsoft would likely be responsible for financing, the report added.

Following that report, Morgan Stanley raised the firm’s price target on Nvidia (NVDA) to $1,000 from $795 and kept an Overweight rating on the shares. Despite the strong year-to-date appreciation, the firm recommends that investors maintain outsized AI exposure, and the stock is the best way to gain that exposure, Morgan Stanley tells investors in a research note. Longer term investments in AI are being fleshed out, the firm adds, noting that hyperscalers are planning data center expansions for the next 3-4 years that would indicate durability, with the biggest headlines being around Microsoft and its $100B “Stargate project”.

Meanwhile, DA Davidson recently raised the firm’s price target on Buy-rated Amazon to $235 from $200. The firm notes that the stock is its “favorite mega cap”, calling for a year of positive trends in AWS as well as Retail profitability. AWS investments in data centers and their custom chips set it up well for the next leg of growth from GenAI, DA Davidson tells investors in a research note, adding that outside of Microsoft’s investment in Azure, no other competitor will even approach the reported $150B in data center investment by Amazon over the next 15 years.

MUSK AND OPENAI: On March 1, Bloomberg’s Saritha Rai reported that Tesla (TSLA) CEO Elon Musk has filed a lawsuit against OpenAI and CEO Sam Altman, alleging the ChatGPT-maker’s multibillion-dollar alliance with Microsoft has compromised the startup’s original mission of building AI systems for the benefit of humanity. “To this day, OpenAI Inc.’s website continues to profess that its charter is to ensure that AGI ‘benefits all of humanity.’ In reality, however, OpenAI Inc. has been transformed into a closed-source de facto subsidiary of the largest technology company in the world: Microsoft,” the lawsuit is quoted to have said.

Subsequently, Macquarie analyst Frederick Havemeyer told investors in a research note that the firm does not see near-term risk to Microsoft’s commercialization of GPT-3.5 or GPT-4 as a result of Musk suing OpenAI. The firm, which made no change to its Outperform rating on Microsoft shares, said the lawsuit adds a measure of near-term risk to Microsoft’s OpenAI services and Copilot products in the event courts rule against OpenAI or Microsoft. If Microsoft loses access to GPT-4 due to any of the cases, it would likely set its Copilot product roadmap back, but it would derail its AI product initiatives, the firm argues.

Then, on March 7, OpenAI said in a blog post: “We are now sharing what we’ve learned about achieving our mission, and some facts about our relationship with Elon. We intend to move to dismiss all of Elon’s claims… Elon said we should announce an initial $1B funding commitment to OpenAI. In total, the non-profit has raised less than $45M from Elon and more than $90M from other donors… In late 2017, we and Elon decided the next step for the mission was to create a for-profit entity. Elon wanted majority equity, initial board control, and to be CEO. In the middle of these discussions, he withheld funding. Reid Hoffman bridged the gap to cover salaries and operations. We couldn’t agree to terms on a for-profit with Elon because we felt it was against the mission for any individual to have absolute control over OpenAI. He then suggested instead merging OpenAI into Tesla. In early February 2018, Elon forwarded us an email suggesting that OpenAI should ‘attach to Tesla as its cash cow’, commenting that it was ‘exactly right… Tesla is the only path that could even hope to hold a candle to Google (GOOGL)…’ Elon soon chose to leave OpenAI, saying that our probability of success was 0, and that he planned to build an AGI competitor within Tesla… Elon understood the mission did not imply open-sourcing AGI. As Ilya told Elon: ‘As we get closer to building AI, it will make sense to start being less open. The Open in openAI means that everyone should benefit from the fruits of AI after its built, but it’s totally OK to not share the science…’, to which Elon replied: ‘Yup’… We are focused on advancing our mission and have a long way to go. As we continue to make our tools better and better, we are excited to deploy these systems so they empower every individual.”

EXPECTATIONS: Current consensus EPS and revenue forecasts for Microsoft’s March-end quarter stand at $2.82 and $60.8B, respectively, according to Refinitiv data.

SENTIMENT: Check out recent Media Buzz Sentiment on Microsoft as measured by TipRanks.