Microsoft's revenue hits a new high! Azure is expanding aggressively with the AI boom, and the number of paid B-side Office cloud users exceeds 400 million.

Zhitong App learned that the US tech giant Microsoft has announced its strongest revenue growth rate since 2022. This strong trend is attributed to people's strong interest in Microsoft's new artificial intelligence products and the global trend of AI deployment, which has driven the scale of spending on cloud computing services. The latest financial data shows that Microsoft's total revenue for the second quarter of the 2024 fiscal year ending on December 31st increased by 18% to a record high of $62 billion, with earnings per share increasing by 33% to $2.93 compared to the same period last year. Both of these core performance indicators exceeded the average analyst expectations compiled by institutions, with revenue expectations of $61.1 billion and earnings per share expectations of $2.78.

Driven by the global trend of AI deployment, Microsoft's total revenue has reached a new high for 5 consecutive quarters! Among them, Microsoft's revenue growth rate reached 30%, surpassing the 29% growth rate of the previous quarter and the average analyst expectation of 28%. The company stated in a conference call with analysts that Azure's revenue growth rate will "continue to remain stable" this quarter. Microsoft's revenue has also driven the quarterly revenue of its Intelligent Cloud division to a new high. In addition, Microsoft's Office cloud services for enterprise users have exceeded 400 million paid users in the second quarter.

After the latest financial report was released, Microsoft's stock price fell nearly 3% in after-hours trading, but later recovered some of the losses. Some analysts believe that the optimistic expectations related to AI have already been reflected in the stock price to some extent.

The latest financial report data indicates that Microsoft's efforts to integrate artificial intelligence into various flagship products such as Azure, Office, and Windows are starting to pay off. However, Sophie Lund-Yates, an analyst at Hargreaves Lansdown, wrote in a report to clients, "Microsoft has a lot to do this quarter." She added that the company "has achieved a series of healthy performances, but it seems not enough to appease the market."

Microsoft's stock price rose 19% in the last three months of 2023, while the S&P 500 Index, the benchmark index for US stocks, only rose slightly over 10% during the same period. Microsoft's stock price in 2023 rose nearly 60%, far exceeding the S&P 500 Index.Microsoft's market value has exceeded $3 trillion, making it the "new stock king" globally, thanks to investors' optimistic expectations for its AI capabilities. Microsoft's market value has surpassed that of Apple, making it the most valuable company in the world.

The global AI boom has helped drive a 30% increase in revenue for Microsoft's Azure cloud services. The revenue growth of Microsoft, which investors are most concerned about, reached 30%, surpassing the 29% growth rate of the previous quarter, the average analyst expectation of 28%, and Microsoft's previous official guidance of 26% to 27% YoY growth in Azure revenue. The quarterly revenue of Microsoft's Intelligent Cloud division, which includes Azure cloud services, servers, and GitHub, reached a record high of $25.88 billion, a 20.4% increase from the same period last year and exceeding analysts' expectations of $25.3 billion.

Microsoft's strong revenue growth in the Intelligent Cloud business in Q2 reflects the strong demand from enterprises amid the global trend of AI technology deployment. The booming development of generative AI requires robust cloud computing capabilities, leading to a growing demand for Microsoft's cloud computing services from enterprises worldwide. The recent rebound in Microsoft's cloud services revenue indicates that the cloud computing-related services of this veteran tech giant are benefiting from the explosive growth in demand for cloud computing-related software and hardware services driven by the global AI trend.

In the era of the global AI boom led by ChatGPT, Microsoft, as the largest shareholder and partner of OpenAI, the developer of ChatGPT, has gained a first-mover advantage. Microsoft has embedded OpenAI's pride and joy, the GPT large model, into its flagship applications such as the Office suite and Azure cloud services, making it the absolute leader in AI application deployment worldwide.

In a report to clients, Brent Thill, an analyst at Jefferies, wrote that although the management turmoil at OpenAI has raised concerns, it may not have a significant impact on Microsoft's AI revenue expectations. Nevertheless, investors are still waiting for Microsoft to provide reliable data and relevant forecasts to demonstrate how and when AI will make a meaningful contribution to Microsoft's profits.Microsoft CEO Satya Nadella has pledged to make Microsoft one of the giants in the field of artificial intelligence by partnering with OpenAI, a leading global startup in the AI field. In a performance statement, Nadella stated, "We have moved from just talking about AI to applying it on a large scale." "By integrating AI into every layer of our technology stack, we are continuously gaining new customers and helping drive new benefits and productivity improvements in every industry."

Microsoft's efforts in AI have received a boost this quarter due to the official release of AI Office software that embeds ChatGPT technology for enterprise use. Additionally, Microsoft's Azure cloud services enable enterprise customers to build their own AI applications on OpenAI's technology, known as Azure OpenAI Cloud Services, which has also driven demand for Azure.

On the enterprise side, Microsoft launched Azure OpenAI Cloud Services last year, which is an enhanced version of Azure cloud services powered by ChatGPT technology. Azure OpenAI Cloud Services is a service provided by Microsoft that allows users to access OpenAI's powerful language models, including GPT-4, GPT-4 Turbo with Vision, GPT-3.5-Turbo, and Embeddings models, through REST APIs. These models can be used for various tasks, including content generation, summarization, image understanding, semantic search, and translation from natural language to code. Users can access this service through REST APIs, Python SDK, or the web-based interface of Azure OpenAI Studio.

Microsoft CFO Amy Hood stated in the performance statement that 6 percentage points of Azure's growth came from AI-driven initiatives, and customers' interest in AI products will drive increased investment in foundational services such as storage and computing power. She also mentioned that the number of paid users for Microsoft's Office cloud services for enterprise customers exceeded 400 million in the second quarter.

In an interview, Amy Hood said, "We want Microsoft's cloud services to be the place where people can confidently run large AI models."

However, considering the expectations and enthusiasm for Microsoft's new AI tools, as well as Microsoft's focus on promoting these tools to customers, some institutional investors may have been looking for larger-scale growth in the cloud computing business segment, and their expectations for Azure's growth may exceed the 30% growth shown in Q2.Senior Portfolio Manager Dan Morgan from investment firm Synovus Trust Co. stated, "In the software business, almost every company worldwide is striving to catch up with Microsoft. Cloud data centers are the hottest area for AI technology deployment, and it is one of the few areas where we can see a significant increase in AI-related revenue. However, this is still not enough to boost market expectations."

In terms of other important business divisions at Microsoft, driven by the growth of over 400 million paid users in the second quarter for enterprise edition Microsoft 365 Copilot and Office cloud services for enterprise end-users, Microsoft's Q2 total revenue for commercial cloud products increased by 24% YoY to $33.7 billion. On November 1, 2023, Microsoft widely released the enterprise edition of Microsoft 365 Copilot to enterprise customers. This AI assistant is designed for core Office applications such as Outlook, Word, PowerPoint, and Teams. It is priced at an additional $30 per user per month on top of existing Microsoft subscriptions. Analysts believe that Microsoft's enterprise edition of Microsoft 365 Copilot may one day become a significant recurring revenue source.

Starting from November 1, 2023, the enterprise edition of Microsoft 365 Copilot will be fully rolled out to enterprise customers. Copilot, the AI tool, will be integrated into collaborative tools such as Word, Excel, PowerPoint, Outlook, and Teams to enhance work efficiency. For example, Copilot can summarize and organize user ideas in Word documents, automatically generate titles or cover images based on user-provided text, and directly incorporate them into user creations. The enterprise edition of Microsoft 365 Copilot can also extract enterprise data to assist in writing Word documents, emails, and planning activities.

According to the latest announcement from Microsoft, the company no longer restricts the scale of Copilot for Microsoft 365 for enterprises (previously required a minimum subscription of 300 seats). This means that any large, medium, or small enterprise worldwide can use this AI product and subscribe to the number of seats as needed. However, they need to contact Microsoft's sales service team to obtain the purchasing pathway for the enterprise version of Microsoft 365 Copilot.In 2024, Microsoft will launch "Copilot Pro," an "office tool" embedded with ChatGPT technology for personal users. This means that Microsoft's C-end users can also use Copilot Pro to improve efficiency in applications such as Word and PowerPoint, following their B-end customers. The new product is priced at $20 per month. This also marks the entry of Microsoft's flagship products, including Word, Excel, PowerPoint, and email software Outlook, into the AI era with ChatGPT technology, and is expected to drive its office software business to a new level of growth.

With Microsoft's Office cloud services for enterprise users surpassing 400 million paid users in the second quarter, Microsoft Q2, including the Microsoft Productivity and Business Processes division, which includes the Office suite of office software, saw a quarterly revenue increase of 13% YoY to $19.25 billion, exceeding analysts' expectations of $19 billion. On the C-end, Microsoft stated that the number of Microsoft 365 consumer users has grown to 78.4 million, compared to 76.7 million in the previous quarter.

Microsoft Q2's More Personal Computing division saw revenue rise to $16.9 billion, an increase of approximately 19% YoY, slightly higher than analysts' expectations. This division currently includes the Windows operating system, Surface hardware, Xbox game consoles, and the acquired electronic game production company, Activision Blizzard. According to market research firm Gartner Inc., global PC sales in the fourth quarter achieved a YoY growth of 0.3%, the first YoY growth in two years, indicating that global PC demand is stabilizing.

Among them, Microsoft's Xbox content and services revenue grew by 61% this quarter, marking the first quarter performance that includes Activision Blizzard Inc., which was acquired by the company in October last year. Last week, Microsoft laid off about 1,900 people in its entire gaming division, many of whom came from Activision Blizzard. On Monday, Xbox appointed Johanna Faries as the new president of the Blizzard division as Microsoft seeks to integrate its post-acquisition business and drive overall revenue growth in the gaming business.

Target price as high as $600! Wall Street bullish on Microsoft AI tool monetization prospects

In 2023, Microsoft is one of the best-performing tech stocks in the US stock market. As of the end of last week's trading, Microsoft's stock price has risen by as much as 63% in the past year, and the full-year increase in 2023 is close to 60%.

The consensus rating and target price compiled by Seeking Alpha show that Wall Street analysts have a "strong buy" consensus rating for Microsoft, with an average target price expectation of $426.03, a historical high, and a maximum of $600.

Truist Securities, a well-known investment institution on Wall Street, recently initiated a "buy" rating on Microsoft stock for the first time and set a three-year target stock price of $600. Truist analyst Joel Fishbein stated in a client report that Microsoft's cloud computing services and artificial intelligence plans are driving revenue into a new round of strong growth trends.

Fishbein said, "We expect Microsoft to continue to enjoy smooth sailing in the next decade as artificial intelligence and cloud services continue to strengthen." He stated that Microsoft's growth drivers include Azure cloud infrastructure services and Copilot AI generation services.

Citigroup analysts on Wall Street recently reiterated their "buy" rating on Microsoft and raised their target price from $432 to $470. The bank believes that Microsoft is a leader in the global generative AI field and has multiple AI monetization tools, which will drive Microsoft's revenue and profit growth beyond expectations. Citigroup expects Microsoft to continue to raise its performance guidance. If 5% of the 77 million Microsoft 365 customers use the paid version of Copilot,By the 2025 fiscal year, there will be an additional $925 million in revenue, and a 15% adoption rate will result in an incremental revenue increase of $2.7 billion.