Microsoft's financial report sparks market discussion, Wall Street's views on the future of AI vary

Intelligent Finance App noticed that Microsoft (MSFT.US) latest fourth-quarter financial report and forecast for the next quarter have sparked a heated discussion on Wall Street about its AI-driven profitability. Some analysts have begun to question whether this AI-driven profit model can be sustained, or if it is losing momentum.

Microsoft expects revenue for the first quarter of the 2025 fiscal year to be between $63.8 billion and $64.8 billion, slightly lower than the expected $65.07 billion. Calculated at a fixed exchange rate, Azure is expected to grow by 28% to 29% year-on-year, with Intelligent Cloud expected to be between $28.6 billion and $28.9 billion, growing by 18% to 20%.

Bullish on Microsoft's AI Prospects

Wedbush Securities analyst Ives holds a relatively optimistic view, believing that this earnings call is a "validation" for investors. Ives maintains an "outperform" rating on Microsoft with a target price of $550.

In an investor report, Ives stated: "Last night, investors were focused on Microsoft's financial report. We believe this earnings call and the guidance for the 2025 fiscal year are very positive, especially when CEO Nadella and CFO Amy Hood mentioned that commercial order volume for the June quarter will increase, and Azure's growth will 'accelerate in the second half of the year' on a 29% baseline growth rate."

"This is a validating earnings call and guidance that showcases the story of Microsoft's cloud computing and the broader artificial intelligence revolution happening in the tech world. Wall Street wanted to hear these voices... and Nadella and the team provided the expected commentary on AI monetization in the market."

However, he pointed out that the performance in the fourth quarter itself was "decent," but "may disappoint those expecting more performance."

Bank of America analyst Seles also holds a positive view on Microsoft, reiterating a "buy" rating with a target price of $510.

He noted that the accelerated development of Azure in the second half of the year "indicates that the soft trend may not last long." In an investor report, Seles wrote: "The adoption of Microsoft's native AI services running on Azure is strengthening (such as Azure AI services and Fabric data/analytics platform). Expected platform leverage will offset capital expenditure/profit pressure. The prospect of a 100 basis point decline in profit margin for the 2025 fiscal year remains unchanged, as the drag on gross margin brought by the growing AI portfolio is to some extent offset by the scale of other businesses (such as core Azure)."

"This illustrates the platform capabilities built into the Microsoft model, where the same AI running OpenAI LLM can be used in other AI-supporting services (such as GitHub Copilot, Microsoft 365 Copilot, and Azure AI libraries)."

Seles raised the capital expenditure expectation for the 2025 fiscal year from $53.8 billion to $58.3 billion, but also noted that revenue growth and accelerated platform scale may occur He added: "We believe that the fourth quarter is the quarter in which the stock achieves premium growth."

Pessimistic Outlook on Microsoft

However, not all analysts are optimistic about Microsoft's quarterly performance and expectations.

Citi analyst Taylor Radke pointed out that Microsoft's performance "affects everyone." Radke reiterated a "buy" rating on Microsoft, but lowered the target price from $520 to $500.

Radke wrote in the report: "This quarter, revenue/earnings per share slightly exceeded expectations, but Azure business slowed down, and the first quarter performance guidance was weaker. Although the situation is mixed, leading artificial intelligence/demand indicators objectively remain positive, with commercial orders increasing by 19% year-on-year, capital expenditures increasing ($19 billion, compared to an expected $16 billion), management indicating that Azure will accelerate growth in the second half of the year as capacity comes online."

"Weak performance relative to expectations and weaker expectations imply a slightly negative trend in recent expectation revisions, which may put pressure on the stock price... But we believe this weakness will be temporary, as leading indicators show that Azure will accelerate growth in the second half of the year, and the profit margin outlook (-100 basis points) looks relatively conservative."

KeyBanc Capital analyst Jackson Ade also highlighted concerns about the slowdown in Azure growth and the significant increase in capital expenditures. However, he added that due to capacity constraints still affecting Azure in artificial intelligence, there is some "room for maneuver" before the expected acceleration in the second half of the year.

Ade reiterated an "overweight" rating on Microsoft with a target price of $490, and mentioned that capacity issues may bring some "additional constraints" to Microsoft in terms of spending, as cash outflows increased by $5 billion on a quarter-over-quarter basis, representing a 75% year-on-year increase