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Microsoft Excels as AI Boosts Sales

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  • Stock beat top and bottom line
  • Fails to please investors

Microsoft has experienced its swiftest revenue growth since 2022, primarily driven by the successful integration of AI products, which have recently enhanced the appeal of its data center services.

Microsoft reported impressive results with a revenue of $62.0 billion[1], exceeding the expected $61.14 billion, and an EPS of $2.93 against the anticipated $2.78 for the December quarter.

The company’s performance was robust across all divisions, with a standout performance from the AI-focused Intelligent Cloud sector, surpassing the $25.29 billion[2 expectations with $25.88 billion. Total cloud revenue hit $33.7 billion, higher than the forecasted $32.31 billion.

The Azure cloud division experienced a 30%[3] increase, beating the 27% analyst prediction, primarily due to the rising demand for cloud AI services, notably from Microsoft’s partnership with Open AI and their product, ChatGPT. AI demand contributed 6 percentage points to Azure’s growth, doubling its impact from the previous quarter.

Despite recording the best top-line growth since 2022, Microsoft’s stock saw a slight dip in after-hours trading and was down nearly 3% the next day of trading, not fully meeting investor expectations.

However, CEO Satya Nadella expressed satisfaction with these results, highlighting the practical application of AI at a large scale. Yet, the future revenue guidance was slightly conservative, projecting $60.5 billion for the next quarter, just below the consensus of $61.2 billion.

Microsoft, as one of the first major tech companies to announce quarterly results, faced a similar slowdown to other tech companies, resulting in workforce reductions and expense cuts following a pandemic-induced growth spurt. And that seemed to have produced results.

Microsoft is up 72% since the beginning of last year, while the tech-heavy NASDAQ is trailing with 49% returns over the same period.

Graph

Source: Yahoo Finance

In the past year, Microsoft reduced its workforce, particularly following its acquisition of Activision Blizzard, which led to an 8% cut in its video gaming staff, totaling 1,900 employees[4]. This move came as part of a broader industry trend of workforce reductions in tech companies like Google and Salesforce.

However, not all of Microsoft’s AI ventures have been successful; for example, their AI-powered Bing chatbot failed to challenge Google’s search engine dominance.

Microsoft’s investment in OpenAI, amounting to around $13 billion for a 49% stake in the startup’s profits and similar AI investments by other tech giants, is attracting regulatory attention in the U.S. and U.K.

This year, Microsoft began with a strong position, leading the pack in AI innovation and overtaking Apple as the most valuable company globally, reaching a $3 trillion market cap[5], a milestone only previously achieved by Apple.

Investors can long Microsoft using our 1x Microsoft, 2x Microsoft, 3x Microsoft. Alternatively, they can short Microsoft using our -1x Microsoft, -3x Microsoft.


Footnotes:
  1. https://twitter.com/ConsensusGurus/status/1752469723067961619/photo/1
  2. https://www.zerohedge.com/markets/msft-shares-unimpresssed-big-top-bottom-line-beat
  3. https://www.cnbc.com/2024/01/30/microsoft-msft-q2-earnings-report-2024.html
  4. https://www.bloomberg.com/news/articles/2024-01-25/microsoft-cuts-1-900-jobs-in-gaming-including-at-activision
  5. https://companiesmarketcap.com/
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