Earnings Preview: Can Microsoft's Q3 performance grow? AI and cloud services remain key

According to Zhitong Finance, Microsoft (MSFT.US) will announce its financial results for the third quarter of the 2024 fiscal year after the US stock market closes on April 25. Against the backdrop of multiple challenges such as global economic inflation, supply chain disruptions, and geopolitical tensions, investors are particularly concerned about whether Microsoft can continue to achieve revenue and profit growth, in order to assess the impact of the macroeconomic situation on large technology companies. Analysts expect Microsoft's revenue for this quarter to be $60.87 billion, slightly down from the previous quarter but higher than the same period last year. Adjusted net profit is expected to be $21.13 billion, a decrease from $21.87 billion in the previous quarter but an increase from $18.3 billion in the same period last year. Adjusted earnings per share (EPS) are expected to be $2.84, compared to $2.93 in the previous quarter and $2.45 in the same period last year.

Microsoft's third-quarter financial report highlights several key points to watch, including Azure cloud services. The market generally expects Azure to maintain stable growth momentum, and any unexpected growth may have a significant positive impact on the stock price. Additionally, the development in the field of artificial intelligence is another important observation point. Investors are eager to understand the company's progress in new product development and monetization opportunities, particularly focusing on the specific impact of artificial intelligence on revenue and growth rates. Furthermore, while Office 365 has been a major growth driver in recent years, it remains crucial despite being overshadowed by the hot topic of artificial intelligence. Other areas of focus include the latest comments on Activision Blizzard, the dynamics of overall business demand, and the ongoing recovery of LinkedIn and Bing advertising business. These factors collectively constitute the key points of Microsoft's financial report, which are worth close attention from the market and investors.

Azure Cloud Services

Following the profit growth in the previous quarter driven by the intelligent cloud business, investors will closely monitor Azure's performance. CFRA analysts predict that under the drive of Azure, the revenue of the entire intelligent cloud sector may grow by 19%, with this business expected to achieve a growth of 29%. Specifically, artificial intelligence is expected to contribute at least 6 to 8 percentage points to this growth.

Furthermore, analysts predict that artificial intelligence will contribute more revenue to Microsoft and help the company achieve high levels of workload optimization that enterprise customers have experienced over the past year. They also point out that the company's recent growth is expected to be sustained.

Analysts at Bank of America expressed optimism about Microsoft's future development, believing that Microsoft is in a favorable position to achieve sustained low double-digit growth over the next 3 to 5 years. This growth is mainly attributed to the continuous adoption of Azure cloud infrastructure platform and its cloud-based Office 365 productivity suite, as well as the positive impact of other related factorsAccording to reports, in the last quarter, Azure grew by 30% year-on-year, with a 28% growth calculated at fixed exchange rates, surpassing the growth rates of Amazon's AWS and Google Cloud. Management stated that AI services contributed 6 percentage points to the growth, and it will be worth paying close attention to whether this number will continue to rise this quarter.

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Artificial Intelligence Field

As an early leader in the AI boom, Microsoft has taken the lead in the field of artificial intelligence through its collaboration with OpenAI.

CFRA analysts believe that AI will make a greater contribution and will support the company in achieving double-digit growth and market share expansion by 2025.

CFRA analysts point out that Microsoft may be in a favorable position in AI-driven growth and write that the company "may monetize AI-related revenue faster than any other cloud/software provider," especially through its partnership with OpenAI.

Analysts at Bank of America stated, "The next catalyst for the stock will be evidence of accelerating key AI product cycles such as M365 copilot over the next few quarters."

Microsoft's stock price has risen by nearly 7% so far this year, and at the time of writing, the stock was up 0.41% in pre-market trading, at $400.63.

Office 365 Performance Remains Crucial

Despite Microsoft's massive scale, its Office suite remains one of the fastest-growing products for the company. Last quarter, the growth rate of Office Commercial reached 15%, while Office 365 saw a growth rate of 17%.

During the same period, the company's paid user base exceeded 400 million, a 9% year-on-year increase, demonstrating varying impacts of revenue growth per user, quantity, combination, and pricing strategies.

Last quarter, apart from GitHub Copilot, the Copilot business did not bring significant revenue, although the business itself could be worth billions of dollars and has 1.3 million paid subscribers, a 30% increase compared to the previous period.

Since then, Microsoft has launched multiple Copilot products for various use cases, covering finance, security, sales, Teams, and other areas.

Investors will closely monitor the market acceptance of these enhanced products. While analysts do not expect these products to make a significant contribution to revenue in 2024, early data on significant productivity improvements should support the market's optimistic expectations for Microsoft's long-term growthManagement expects that the revenue growth rate of Office 365 will remain at 15%, indicating a slowdown compared to the previous quarter.

Other Areas

In other business areas, including Bing, LinkedIn, hardware, gaming, and Windows, Microsoft has also demonstrated its innovation and market adaptability in multiple small but high-growth potential markets. LinkedIn, as an important window reflecting the employment economy and advertising market, will provide key indicators for the market. At the same time, the newly launched AI-driven Bing and Microsoft Surface updates may also bring new growth momentum to the company.

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Affected by different tailwinds and headwinds, most of these businesses are either declining or growing at single-digit rates.

Conclusion

Analysts predict that Microsoft will exceed expectations in this quarter's financial report and may continue to maintain industry-leading profit margins and return on investment. With the continuous growth in market demand for AI applications and cloud services, Microsoft's long-term growth prospects are optimistic, providing investors with reasons to continue paying attention.