Microsoft is expected to announce its slowest quarterly revenue growth in a year this Wednesday. Investors are eagerly awaiting signs of demand for artificial intelligence (AI) as concerns grow about the slow return on significant investments in this technology.
As a key player in the generative AI landscape, Microsoft has made substantial investments in OpenAI, the creator of ChatGPT. However, recent reports indicate slow adoption rates for some of its key products, such as the $30-per-month Copilot assistant designed for enterprises.
Morgan Stanley analysts noted that there is “a wall of worry” surrounding Microsoft’s earnings. They highlighted issues like rising capital expenditures, margin compression, and a lack of clear evidence regarding returns from AI investments. Additionally, the company recently changed how it reports its business results, complicating the estimation of its last quarter’s performance.
Since its last earnings report in late July, Microsoft’s stock has increased by just about 1%, lagging behind the benchmark S&P 500 index. Nevertheless, the stock is up approximately 14% for the year.
According to analysts polled by Visible Alpha, Microsoft’s Azure cloud-computing unit is likely to have grown by 33% in the fiscal first quarter that ended on September 30. While this aligns with the company’s expectations, it is slightly lower than the growth reported in the previous quarter.
Microsoft has mentioned that the contribution of AI to Azure has increased, accounting for 11 percentage points of growth in the last quarter. However, the overall growth rate for the business has slowed. In July, Microsoft indicated it expected Azure growth to accelerate in the second half of the fiscal year.
Analysts predict that Microsoft’s total revenue for the September quarter will have risen by 14.1% to $64.51 billion. Microsoft has cautioned that, like its competitors in AI, spending on this technology will remain high. Estimated capital spending for the September quarter is projected to jump 71.7% to $19.23 billion.
Concerns Over Copilot Adoption
Despite the optimism surrounding Copilot, adoption rates have not met Microsoft’s initial expectations. A survey conducted by research firm Gartner in August revealed that most IT companies have not moved past the pilot stage for their Copilot initiatives.
However, some analysts believe that Microsoft’s recent developments—such as the ability to create autonomous AI agents that can perform routine tasks without human input—could enhance the adoption of Copilot.
“Most investors seem skeptical of 365 Copilot adoption since they aren’t using it personally very much,” said Melius Research analyst Ben Reitzes. “However, it seems Copilot data points are getting modestly better,” he added, noting that the assistant is attracting an increasingly strong customer base.
Microsoft’s productivity and business processes unit, which includes Office products, LinkedIn, and 365 Copilot, is expected to report stable quarter-on-quarter growth of 12%. Bernstein analyst Mark Moerdler, one of the top-rated analysts for Microsoft, estimates that revenue from the intelligent cloud unit, which includes Azure, likely grew by 20%, maintaining the same pace as the previous quarter. He also noted that growth in the personal computing unit, which covers Windows and gaming, likely improved as the PC market stabilized.
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