Microsoft (MSFT) is likely to surpass market estimates for its fiscal second quarter this week, with the technology giant’s financial results a “key barometer” for the pace of artificial intelligence spending, according to Wedbush Securities.
The brokerage forecasts the company to post earnings and revenue above the Street’s view of $2.77 per share and $61.13 billion for the December quarter. Investors’ attention will be on the growth of cloud-computing platform Azure, given the activity levels seen during the period from core Microsoft customers heading to the cloud, Wedbush said in a Sunday client note.
Customer conversation rates around the Copilot chatbot will also be on investor focus during the earnings call by senior management, as well as early deal sizes and the pace of AI use cases on Azure heading into the next 12 to 18 months. Wedbush anticipates “some conservatism around guidance,” as the Street is aware of the beginning of a three-year period of AI hyper growth ahead.
Fiscal 2025 is set to be the “true inflection year” for AI growth, with pricing, beta customers and use cases all being rolled out over the next three to six months, analysts led by Daniel Ives wrote in the note. Wall Street has yet to price in the next wave of cloud and AI growth in Microsoft’s stock, as the company has a “strong competitive cloud edge” versus rivals Amazon.com (AMZN) and Alphabet’s (GOOG, GOOGL) Google.
Copilot could add another roughly $25 billion to the technology giant’s topline by fiscal 2025, based on Wedbush’s recent partner checks. The analysts also estimate that for every $100 cloud Azure spend with Microsoft in the past few years, there is an incremental $35 to $40 of AI spend for the company in the future.
“Our thesis remains that the cloud and underlying Office 365/Windows ecosystem is going to comprise a bigger and bigger piece of Redmond going forward and will ultimately spur growth and margins into the rest of (fiscal 2024/2025),” Ives said, referring to the company’s headquarters in Washington state. “We also believe Redmond is just starting to hit its next gear of growth with ChatGPT and AI also adding a new layer of growth to the MSFT story over the coming years.”
Wedbush maintained its outperform rating on Microsoft’s stock and reiterated the 12-month price target of $450. The company is scheduled to release its latest financial results after the markets close Tuesday.