Microsoft
earnings are coming next week as Big Tech looks to recover its momentum. Don’t expected artificial-intelligence investments to have paid off just yet.
Microsoft
(ticker: MSFT) investors don’t look to be too excited ahead of the company’s earnings announcement next Tuesday. The company’s shares were down 0.3% at $330.25 in early trading on Friday and have fallen 3.6% in the last three months.
Elevated bond yields have hurt the entire tech sector but analysts still think AI is a catalyst for the company.
“Microsoft is arguably best positioned to become the AI operating system and to massively upsell to its 1 billion plus subscribers,” wrote Oppenheimer analyst Timothy Horan in a research note this week.
Horan has a Buy rating and $410 target price on Microsoft.
The most likely lever for Microsoft to start generating serious AI profit will be the launch of the company’s 356 Copilot AI assistant for business customers at the start of November.
That means Tuesday’s report could be a damp squib on the AI front, at least in terms of reported earnings. Microsoft has previously said it expects revenue growth of around 25%-26% for its Azure cloud-computing unit for the September quarter, with AI services representing two percentage points of that.
“Based on consistent commentary from many software companies that [the] AI ramp will be more measured in the near term, we don’t expect the… AI contribution to meaningfully beat management’s guidance,”
Stifel
analyst Brad Reback wrote.
However, that just means all the more attention on Microsoft’s AI forecast. Microsoft has set the price for 365 Copilot at $30 per user per month. Analysts at Macquarie have estimated it could generate around $14 billion in revenue in its first full year if 10% of Microsoft’s existing corporate users sign up.
Stifel’s Reback said that investors will likely have to wait until the second half of Microsoft’s fiscal year, which would mean the March quarter, to gauge the Copilot gains. However, when it does begin he expects it to help drive double-digit percentage growth for Microsoft’s Office 365 revenue.
Reback kept a Buy rating and $380 target price on Microsoft stock.
If that still sounds too much like delayed gratification then there could be at least one short-term validation of Microsoft’s AI investments. ChatGPT developer OpenAI was reported by Bloomberg this week to be in talks to sell shares at an $86 billion valuation. Microsoft owns 49% of Open AI, which it purchased for a reported $13 billion.
If OpenAI successfully sells shares at the reported valuation, then Microsoft will be sitting on a paper profit of around $29 billion.
Write to Adam Clark at adam.clark@barrons.com
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