Microsoft is counting on AI. The Wall Street giant's earnings ahead 💡

• Investors will be looking primarily at revenues related to cloud solutions (Intelligent Cloud) and Azure, which are currently the company's main drivers
• Expectations for the report are quite bullish and the company is among the top 6 Wall Street companies expected to report 100 billion in earnings for the fourth quarter of fiscal 2023
• Consensus for EPS is $2.78 (nearly 20% y/y growth) and for revenue of $61.1 billion (nearly 16% y/y growth)
• In addition to the results themselves, key information for the company will be provided during the post-earnings conference call, when guidance for the coming quarters will be given
• The options market is suggesting a price rise after the release of Microsoft's report as high as around $425 per share

Artificial intelligence drives Microsoft's growth

One of Microsoft's flagship products, the Azure cloud, has struggled for several quarters, and even after the previous quarter, the company didn't show a very good outlook. This is now expected to change. Azure cloud sales are expected to have grown 29% according to Blomberg's estimate, against a market consensus of 27% (the previous quarter was 28% growth). Recent interest in artificial intelligence is expected to be largely responsible for this growth. Investors' attention will also be turned toward another new Intelligent Cloud product, Copilot. It is worth mentioning that the cloud segment was responsible for 41% of revenue and 43% of operating profit in fiscal 23.

Activision Blizzard acquisition

It is worth noting that the acquisition of gaming company Activision Blizzard was completed on October 13, and is expected to bring in $1.6 billion in revenue in the second fiscal quarter (Q4 23 calendar year). For the entire 2024 calendar year, Activision Blizzard is expected to bring $5-6 billion to the company. The acquisition may have reduced margins for the past quarter, but later in the year we should see a significant improvement in this regard, which may also be announced at the conference.

Biggest competitor

In terms of its cloud business, Microsoft has no bigger competitor than Amazon, which also releases its results on Thursday. Cloud revenue growth has slowed at Amazon in 2023, and the company may introduce measures to regain more market share. According to Synergy Research Group data for last year, Amazon's AWS cloud held about 32% of the market share, with 22% from Azuer and 11% with Google Cloud from Alphabet.

Valuations too high?

Following the release of financial data for the previous quarter in October 2023, the company's shares rose less than 5%, just before a correction of slightly more than 5%. However, the stock quickly returned to growth, catching on to the trend associated with artificial intelligence. The July price peaks were beaten in November, and since the previous financial report, Microsoft's shares have beaten $400 per share and risen about 18%. The company currently has a P/E (12-month EPS) valuation of about 38-39 points, and a P/E (projected earnings) of 35-36 points. These valuations are approaching the highest levels from the time of "covid" growth, and some point to over-optimism about the potential for further growth of the cloud business. On the other hand, there are comments that the report and future prospects should defend the company's "high valuations." The company currently has 60 buy, 5 hold and 0 sell recommendations. The average target price for the company is $432 per share, with the current price around $409. The options market, on the other hand, indicates a possible move to $425 per share on a positive reception of the report.

Microsoft shares are in a clear uptrend. We have not seen a major correction on the company since January 8. Source: xStation5

Key financial data for the company. Source: Bloomberg Finance LP, XTB

Comparison of key data for cloud companies. Source: Bloomberg Finance LP, XTB

Share price changes since the beginning of the fourth quarter of calendar year 2023. Source: Bloomberg Finance LP, XTB