Earnings season will turn up the volume dial next week when several of the tech giants enter the fray. Amongst them will be Microsoft (NASDAQ:MSFT), who will step up to deliver its fiscal first quarter of 2024 (September quarter) report on Tuesday (Oct 24) once the market action comes to a close.
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While Microsoft’s headline metrics beat expectations in the June quarter report, investors were left disappointed by the slowdown in cloud service Azure’s revenue growth. Looking ahead to the print, Morgan Stanley analyst Keith Weiss thinks expectations have “become more reasonable for F1Q.”
Considering indications of “persistent Cloud optimization and mixed channel checks,” investors are currently calling for constant currency (cc) Azure growth of 26-27%. This compares to the F1Q growth rate of 25-26% provided by management while the Azure growth guide for F2Q is anticipated to indicate a continued trend of stabilization in the deceleration rate, also at 25-26% cc growth.
Within the context of Azure growth, investors are anticipating a slight increase in the contribution from Generative AI in FY24. This is expected to build upon the 2% contribution anticipated in F1Q. Of course, considering the huge success of ChatGPT (and Microsoft’s investment in its maker OpenAI), it is the Generative AI opportunity that is bound to be on investors’ minds. It’s an opportunity clear to Weiss, who is adamant Microsoft is “best positioned in Software to monetize GenAI across infrastructure & apps,” but he reminds investors it will take time to properly manifest itself.
“We remain firmly convicted in a large opportunity ahead of Microsoft within Generative AI and the company’s strong positioning to execute to that opportunity, however investors must keep in mind the timing of enterprise adoption cycles in setting expectations for upcoming results,” the 5-star analyst explained. “With Microsoft 365 Copilot going into general availability on November 1, we’re unlikely to hear much validation of the pent-up demand for the solution from this conservative management team, and investors must be understanding of enterprise adoption cycles when assessing generative AI impacts in Azure.”
“Bottom-line,” Weiss summed up, “we are still in the early stages of this innovation cycle, and fundamental momentum is likely to build through FY24.”
The upshot of all the above is that Weiss reiterated an Overweight (i.e., Buy) rating to go alongside a $415 price target. There’s potential upside of 26% from current levels. (To watch Weiss’ track record, click here)
Overall, the bulls are out in heavy attendance for MSFT. Barring 4 Hold ratings, all 32 other analysts who issued a review over the last 3 months, recommend the stock as a Buy. With an average price target of $398.28, the analysts foresee further upside of ~22% in the months ahead. (See Microsoft stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
