Microsoft (MSFT) reports third-quarter earnings after the closing bell, with investors focused on the AI developments that are powering gains in its search business and growth rates in its key Azure cloud division.
Analysts expect Microsoft to post a bottom line of $2.23 a share for the three months ended in March, the group's fiscal third quarter, a tally that is largely flat to a year earlier. Revenue is forecast to nudge 3.3% higher to just over $51 billion, powered by sales in Microsoft's Intelligent Cloud division.
Microsoft itself forecast March-quarter revenue for its Intelligent Cloud division of between $21.7 billion and $22 billion, a tally that missed Wall Street estimates.
Azure growth, which in the prior quarter slowed to 31% year-over-year, will be closely tracked as companies worldwide pare back spending on cloud and IT infrastructure projects amid an uncertain macro backdrop.
Azure's growth rate, which was not long ago hovering north of 50%, would slide below 30% for the March quarter and trough in the mid-25% range before the end of the year, according to analysts' forecasts.
Chief Financial Officer Amy Hood noted on the group's last earnings call that Microsoft's customers were "exercising caution" in terms of business investment, adding that growth continued to moderate, particularly in December. She added that "we exited the quarter with Azure constant-currency growth in the mid-30s."
Office 365 Revenue Growth Slowing
Commercial revenue from Office365 could also be under pressure as companies in the coming months pare the pace of hiring and double down on job cuts. Productivity and business division revenue, which includes Office 365, are likely to come in flat to the previous quarter at around $17 billion.
“We're positive long-term positive on Microsoft’s leadership in multiple segments and benefit from spending consolidation and 'hyperscale' leadership bolstered by at-scale compute demand for emerging AI/generative AI data, training, and application deployment,” said KeyBanc Capital Markets analyst Michael Turtis. He carries an overweight rating on MSFT stock with a $335 price target.
The group's plans to embed a newer version of ChatGPT, a tool that uses human language to process instructions, in both its Edge internet browser and Bing search engine over the coming months will also be in focus as it challenges Google's (GOOGL) search market dominance.
Investors are betting that AI adoption will help Microsoft -- which generated just $3.2 billion in search revenue last year -- challenge the market dominance of Google, which churned around $43 billion.
Bing Is the New Google
“Bing is now the best search engine for the first time in at least 20 years, which means a huge new opportunity to gain share from Google,” said D.A. Davidson analyst Gil Luria, who rates Microsoft at buy with a price target of $325 per share.
“Bing doesn’t have to win the market – for every 1 single point of share it takes it will grow $2bn in revenue and $0.10 in earnings. Considering Google has >80%, that is a big opportunity," Luria said. "We expect the focus to be on the two big improvements to the business related to generative AI."
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Reports have also suggested Microsoft is working on developing its own AI chips in order to lower costs as it advances its large-language model capabilities with OpenAI. That's the artificial intelligence group founded by Tesla (TSLA) CEO Elon Musk.
Microsoft unveiled a multibillion investment into OpenAI in January, following a $1 billion infusion in 2019 and a smaller investment in 2017.
"With Microsoft a clear market leader in the AI race at the moment, this battle will be a long one over the next decade as we expect other technology companies besides Google (Bard), such as Apple, Meta, and other tech stalwarts along with smaller players in the industry, to collectively spend billions in this AI arms race over the coming years," said Wedbush analyst Dan Ives.
"We estimate this is an $800 billion market opportunity over the next decade as this AI Game of Thrones plays out across the enterprise and consumer tech space."
The group's pending acquisition of videogame maker Activision (ATVI) will also be the subject of commentary from company officials. That will follow an update from Britain's Competition and Markets Authority that the $69 billion deal would not restrict competition in U.K. console gaming services.
The deal, which was unveiled by Microsoft in January 2022, is also facing challenges by the U.S. Federal Trade Commission and European regulators, both of which have raised concerns that it will limit customer choice and ultimately lead to videogame-price increases.
Microsoft, for its part, signed a 10-year agreement with Japan-based rival Nintendo (NTDOY) that will allow Activision's "Call of Duty" franchise to remain available on its consoles, in an effort to convince EU regulators that the deal will benefit the broader industry.
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