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Long before Microsoft (MSFT) dipped its hands in the artificial intelligence (AI) race, the company had run a profitable business. Despite macroeconomic headwinds, the software giant increased its revenue and profits steadily over time, thanks to its diversified business segments. Shares of Microsoft, which offers both hardware and software solutions to small and large businesses and consumers worldwide, have has gained roughly 834% in the last 10 years.
More recently, Microsoft’s stock has climbed 36.6% year-to-date, outperforming the tech-heavy Nasdaq Composite’s ($NASX) gain of 15%. Microsoft's early-mover advantage in AI is starting to pay off now. Its healthy Q1 fiscal 2024 results has clearly made Wall Street more optimistic about the company’s ability to capitalize on AI opportunities, with shares up more than 2% today.
Artificial Intelligence Boosts Microsoft’s Fundamentals
Microsoft wrapped up its fiscal 2024 first quarter (ended Sept. 30) on a strong note, beating analysts’ estimates for both revenue and earnings. Net profits came in at $22.3 billion, or $2.99 per share, which sailed past estimates by $0.34. Earnings increased by a whopping 27% year-over-year. The software company generated $56.5 billion in revenue, a 13% increase year-over-year, which surpassed forecasts by around $2 billion.
Microsoft's personal computing (PC) business has been struggling for the past few quarters. However, in Q1, revenue for the segment increased by 3% to $13.7 billion, driven by a surge in Windows revenue. The segment also includes gaming revenue, which jumped 9% to $309 million, led by growth in Xbox content and services.
On Oct. 13, Microsoft closed the $69 billion deal to acquire California-based Activision Blizzard, maker of popular games like Call of Duty, World of Warcraft, Diablo, and more. This acquisition could further boost the company’s gaming revenue in the upcoming quarters.
Furthermore, revenue in the productivity business segment - which includes its Office products, LinkedIn, and other dynamic products - also jumped 13% to $18.6 billion for the quarter.
Microsoft made a sizable investment in OpenAI in 2019, and announced the third phase of that partnership early in 2023. Since then, the company has integrated AI into its flagship Office products and enterprise cloud platform, Azure.
Talking about it, CEO Satya Nadella noted in the earnings call, “Because of our overall differentiation, more than 18,000 organizations now use Azure OpenAI service, including new-to-Azure customers.”
Microsoft’s Cloud Segment Drove Significant Growth in Q1
With a 22% market share, Microsoft holds the second-leading position in the cloud market, after Amazon’s (AMZN) Amazon Web Services (AWS). Its cloud segment, driven by Azure AI, was the biggest growth driver in the quarter. Its Intelligent Cloud-based segment yielded astounding growth of 19% to $24.3 billion, led by Azure.
Microsoft ended the quarter with cash, cash equivalents, and short-term investments of $144 billion, and long-term debt of $42 billion. Additionally, free cash flow was up 22% year-over-year to $21 billion.
Management also discussed that the company is “rapidly infusing AI across every layer of the tech stack and for every role of business process to drive productivity gains for our customers.”
Expect More Growth Leading to the Second Quarter
Turning to guidance, Microsoft anticipates sustained growth fueled by the incorporation of AI into its products.
The company expects Intelligent Cloud revenue to grow by 17% to 18% in the second quarter, arriving in the $25.1 billion to $25.4 billion range. Azure will be the main driver of this, with potential growth of 26% to 27% from AI-led contributions.
Overall, fiscal second-quarter revenue could be in the range of $60.4 billion to $61.4 billion, which would represent growth of around 15%. Meanwhile, analysts expect revenue to be around $58 billion for fiscal Q2.
With an optimistic outlook, management noted, “We will continue to deliver healthy growth in the year ahead, driven by our leadership in commercial cloud and our commitment to lead the AI platform wave.”
Looking further ahead, analysts expect Microsoft’s top line to increase from $212 billion in fiscal 2023 to $241 billion in fiscal 2024. That represents year-over-year growth of 14%. In fiscal 2025, analysts predict revenue to further rise by about 13.0% to $271 billion.
In addition, analysts expect EPS to jump 11.1% to $10.90 in fiscal 2024, further increasing to $12.43 in fiscal 2025. Microsoft currently trades at 26 times forward earnings based on fiscal 2025 growth estimates, which seems reasonable for a hyper-growth stock.
What Are Analysts Saying About MSFT?
Following the robust quarterly results and upbeat outlook, analysts at Piper Sandler, BofA, and Goldman Sachs (GS) all raised their target price for MSFT, while Wedbush also weighed in positively on the shares.
Overall, Wall Street rates MSFT as a “strong buy.” Out of the 36 analysts covering MSFT, 30 have a “strong buy” recommendation, 3 suggest a “moderate buy,” and 3 call it a “hold.”
Based on analysts' average price target of $386.14, Wall Street sees a potential upside of about 14% in the next 12 months. The price target ranges from a high of $440 to a low of $232.
The Verdict
AI is undoubtedly a transformative force, and investing in companies leading the charge in AI technologies can be a wise decision for long-term investors. Microsoft, with its brand name, thirst for innovation, strong balance sheet, and ability to optimize AI across all of its diverse business segments, could drive gains in the long haul. That said, AI is a niche that hasn't been fully explored yet, so investors should be cautious while making investment decisions.
On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
