Microsoft Faces Discerning Investors as AI Frenzy Wanes

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Microsoft Corp. is expected to face a more discerning investor audience as it reports earnings, with the hype around artificial intelligence (AI) fading. Previously, the company received praise on Wall Street for its AI ambitions, including its investment in ChatGPT creator OpenAI and early previews of AI integration into its products. However, the sentiment has shifted, and investors are now questioning the functionality, profitability, and competitive advantage of AI.

Investors are now more focused on Microsoft’s current performance rather than potential AI advancements, particularly in relation to Copilot. Copilot is a software tool designed to enhance popular Microsoft products. Fortunately for Microsoft, AI still plays a role in the company’s Azure cloud-computing narrative, which is important considering investors’ concerns about industry growth trends. The demand for AI services, including access to the enterprise API for OpenAI, could contribute to Azure’s stabilization and achieve around 26% year-over-year growth.

Analysts suggest that Microsoft will present solid fiscal first-quarter results that demonstrate Azure’s stability. There is potential for upside from AI Services within Microsoft’s Azure results. As the AI frenzy subsides, investors seek tangible evidence of Microsoft’s performance and growth.

Microsoft’s Outlook for Azure and Copilot

Microsoft’s projected outlook for Azure, the company’s cloud computing platform, is anticipated to have a significant impact on its stock movement, according to TD Cowen analyst Derrick Wood.

Investors are expecting a constant-currency growth of 25% to 26% for Azure in the December quarter, with a substantial portion of that growth attributed to artificial intelligence (AI). If Microsoft’s guidance exceeds this projection by 100 basis points, there could be a strong positive reaction in the stock market. Conversely, if the company’s target falls 100 basis points below the consensus view of 25.5%, a modest selloff may occur.

While there are various factors that could influence the guidance, such as AI and macro/optimization efforts, Wood expects a balanced and realistic outlook from Microsoft.

Regarding Copilot, Microsoft’s AI-driven tool for Microsoft 365, Wood believes that it is currently in beta mode with “hundreds of large customers.” However, the extent of adoption among these customers remains uncertain, making it unlikely to have a substantial impact on the company’s December-quarter outlook.

Read: Microsoft’s ‘undeniable’ opportunity in AI makes the stock a buy, says this bull

Keith Weiss from Morgan Stanley recommends patience when approaching Microsoft’s upcoming report.

He highlights that since Microsoft 365 Copilot will only be available on November 1, it is unlikely that the report will provide much validation of the pent-up demand for this solution. Investors should also consider the longer adoption cycles typically observed in enterprise-level AI implementation when assessing the potential impacts on Azure.

While chief information officers express enthusiasm about the opportunities presented by AI, a recent survey conducted by Morgan Stanley indicates that most do not expect to launch major AI projects until 2023.

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