The reaction from analysts on Wall Street after Microsoft’s latest results was mostly resounding: The tech company continues to deliver on high expectations for demand driven by artificial intelligence, and has earned its place as the world’s most valuable public company.
The stock market’s reaction is more muted. Shares in the company fell 1.4% in early trading on Wednesday following the release of the results late Tuesday.
Microsoft
reported earnings of $2.93 a share on revenue of $62 billion in the three months ended in December, the company’s fiscal second quarter. The results beat expectations among analysts surveyed by FactSet for earnings of $2.77 a share on revenue of $61.1 billion.
“We’ve moved from talking about AI to applying AI at scale,” said Microsoft Chairman and CEO Satya Nadella. “By infusing AI across every layer of our tech stack, we’re winning new customers and helping drive new benefits and productivity gains across every sector.”
Expectations were high for the company, but still Microsoft delivered, proving that the much-hyped benefits of AI are seeping through to the bottom line. That could grease the wheels for more gains across tech stocks.
“This was another masterpiece quarter and guidance from Nadella that will send a major ripple impact across the tech world tomorrow as the AI Revolution is here,” Dan Ives, an analyst at broker Wedbush and tech bull, said on Tuesday.
The proof is in the booming business of Azure, which is at the heart of Microsoft’s Intelligent Cloud segment. Revenue at Azure and other cloud services surged 30% on an annual basis, helping sales growth across Intelligence Cloud surge 20% to $25.9 billion.
“Microsoft has considerable product and business momentum, and generated healthy double-digit revenue growth across all three of its business segments, led by Intelligent Cloud’s 20% gain,” said Scott Kessler, an analyst at research firm Third Bridge. “Azure revenue growth is consistently seen as the most important data point Microsoft provides … and current quarter growth is seen as ‘stable.’”
Wall Street likes “stable.” But perhaps a frothy stock market—with the
Dow Jones Industrial Average
and
S&P 500
sitting at all-time highs—was looking for more.
“Despite this cracking set of numbers Microsoft shares slipped back in after-hours perhaps due to some disappointment on the guidance front when it comes to Q3,” said Michael Hewson, an analyst at broker CMC Markets.
Indeed, Microsoft said it expects revenue in Intelligence Cloud to be between $26 billion and $26.3 billion in the current quarter. The upper end of this range marks quarter-over-quarter growth of just 1.5%, compared to the quarterly growth rate of 6.6% notched in the latest set of results.
Sure, expectations among analysts ahead of earnings were for current-quarter Intelligence Cloud revenue of $25.9 billion—below the new guidance range. But that consensus estimate was as of Dec. 29, and the stock had climbed 8.7% since then as of Tuesday’s close.
“Microsoft upped their quarterly growth guidance … all to no avail. Expectations were simply too high to match,” said Steve Clayton, head of equity funds at broker Hargreaves Lansdown.
Some analysts even see the revenue results from Azure as lagging behind the best-case scenario. “They were a bit below what our Plausible scenario anticipated, indicating slightly moderating business momentum,” said Guggenheim analyst John DiFucci.
Microsoft shareholders shouldn’t be dismayed. They can still look to the stock’s gain of more than two-thirds over the past year, and hope for the upside that some analysts still see.
“We believe that the combination of accelerating AI demand and easing optimization headwinds create an opportunity for overall Azure growth to potentially accelerate in 2H,” said Evercore analyst Kirk Materne.
D.A. Davidson, for its part, was not among the unimpressed. Analyst Gil Luria raised his target price on Microsoft, which he rates at Buy, to $500 from $415. “Looking forward, management provided positive commentary around increasing demand for Microsoft Cloud as well as positive margin expansion even with increasing capital expenditures related to the build-out of their AI infrastructure,” Luria said.
Write to Jack Denton at jack.denton@barrons.com
Read the full article here
