As Microsoft (MSFT) approaches its fiscal fourth-quarter earnings report, slated for release after Tuesday’s market close, the spotlight is firmly on the company’s significant investments in artificial intelligence (AI). Investors are eagerly awaiting to see whether Microsoft’s substantial outlay in AI will start to yield the anticipated returns, a crucial benchmark for the tech giant’s financial performance.
Microsoft’s stock recently closed at $426.73, reflecting a 1.5% increase for the day and a notable 13.5% gain year-to-date. However, this figure marks an 8.9% decline from its peak of $468.35 on July 5. Despite this recent dip, the company’s performance in 2024 has been strong compared to its exceptional 53.6% rise in 2023. The question now is whether Microsoft can sustain its growth trajectory and deliver the substantial returns on its AI investments that investors are hoping for.
The core concern for investors revolves around the effectiveness of Microsoft’s AI investments. As the tech sector has seen a surge in spending on AI technologies, there is growing pressure to demonstrate that these investments are translating into tangible financial benefits. Analysts, including Gil Luria from D.A. Davidson, are keenly focused on whether Microsoft can show continued revenue growth driven by its AI initiatives. They emphasize the need for evidence that Microsoft’s substantial capital expenditures in AI are starting to produce significant revenue acceleration. Without such proof, there is a risk of investor disappointment if growth falls short of expectations.
For the upcoming report, analysts forecast Microsoft to achieve fiscal fourth-quarter revenue of approximately $64.2 billion, marking a 14% increase from the previous year. This growth rate represents a slight decrease from the 17% growth recorded in the fiscal third quarter, which ended in March. Additionally, earnings per share (EPS) are estimated to be $2.90, reflecting an 8% increase year-over-year. The critical focus will be on whether this growth can be attributed significantly to AI and if it meets or exceeds investor expectations.
A key area of scrutiny will be Microsoft’s Intelligent Cloud business, which encompasses its cloud computing services and technologies. This segment is crucial to Microsoft’s AI strategy. Last year, the Intelligent Cloud business reported $24 billion in revenue, with AI contributing 7% to that growth. Investors will be looking for an increase in this percentage and overall growth in the cloud segment to gauge the effectiveness of Microsoft’s AI investments.
Moreover, Microsoft’s substantial investment in OpenAI, amounting to $13 billion, underscores its commitment to leading the AI revolution. The company’s willingness to invest further in AI will be a critical factor in evaluating its future performance. The key question will be whether these investments have resulted in meaningful growth in Microsoft’s cloud business and whether the AI contribution has increased compared to the previous year.
The broader tech sector’s recent volatility adds to the context of Microsoft’s earnings report. The frenzy surrounding AI investments has led to significant fluctuations in tech stock prices. For example, Nvidia (NVDA) saw its shares soar by 174% earlier in the year but has since experienced a 17.6% decline as some investors decided to lock in profits. Similarly, Alphabet (GOOGL) shares have dropped 6.7% following concerns over AI spending, despite some analysts suggesting that this reaction may have been an overreaction.
Microsoft’s performance will also be compared against other major tech companies reporting earnings this week, including AMD, Meta Platforms, Arm Holdings, and QUALCOMM. Additionally, earnings reports from Apple (AAPL), Amazon.com (AMZN), and Intel (INTC) later in the week will further influence market sentiment and investor expectations.
The outcome of Microsoft’s earnings report will have significant implications. A shortfall in expected AI-driven growth could lead to a negative reaction in Microsoft’s stock price, reflecting broader concerns about the pace and effectiveness of its AI investments. Conversely, a strong performance that meets or exceeds expectations could boost investor confidence and positively impact Microsoft’s stock valuation.
Ultimately, this earnings report is a pivotal moment for Microsoft to demonstrate the returns on its substantial AI investments. The results will not only impact Microsoft’s stock performance but also offer insights into the broader effects of AI spending across the technology industry. Investors and analysts alike will be closely watching to see if Microsoft can deliver on its ambitious AI promises and continue its growth trajectory.