- Software giant remains favoured pick of many in cloud and AI
- Overall revenue +15%, Azure cloud +29%
- Investors and analysts may have got a bit ahead of themselves
There’s lots of talk across the internet about Microsoft’s (MSFT:NASDAQ) fourth quarter (to end June) cloud and AI (artificial intelligence) revenue falling short of expectations. That might be so, but a look at the underlying numbers paints a picture of still incredibly robust growth.
Azure, Microsoft’s cloud business grew 29% versus 30.2% forecasts, hardly a drama for the longer run. If you accept that Azure is widely viewed as a barometer for AI demand and related growth then it accounting for about 8% of Azure’s total growth, up from 7% in Q3, is an encouraging sign, especially so given corporate commentary that clearly explained that limitations are capacity driven, not demand led.
How many other software businesses must eye these growth numbers green with envy?
DEMAND-LED INVESTMENT
In short, Microsoft simply doesn’t have access to a large enough Azure datacentre estate, something that can be rectified down the line, and why the software giant is so committed to upping investment.
Capital spending jumped to $19 billion in Q4, up from $14 billion in Q3, and nearly double the $10.7 billion seen in Q4 a year ago.
Yet at one stage in after-hours trading, Microsoft stock had fallen 7.5%, before bouncing sharply. Pre-market data for today’s Wall Street open has the shares off by about 2.6% at $412.
The stock started 2024 at $376, so year-to-date gains would still run to 10%, albeit, below the overall S&P 500’s 15% or Nasdaq’s 16%.
Bear in mind that Microsoft remains the clear global number two in cloud computing (approx 25% market share), behind Amazon’s (AMZN:NASDAQ) AWS (31%), with 300-odd datacentres, according to June data from Visual Capitalist, more than AWS and significantly more than the likes of Alphabet’s (GOOG:NASDAQ) Google Cloud (25) or Meta Platforms (META:NASDAQ) (24). Apple (AAPL:NASDAQ) has just 10, the data shows.
So, have expectations for Microsoft been pushed to breaking point? The rolling 12-month PE (price to earnings) multiple stands at about 31, according to Stockopedia data. Alphabet and Meta are on about 21-times, so perhaps investors and analysts have got a bit ahead of themselves.
EXPERTS HAVE THEIR SAY
Even so, analysts at Jefferies rallied behind Microsoft by calling it a ‘Top Pick’, saying the company ‘remains in pole position for the AI marathon’.
‘Positively, Microsoft expects Azure’s growth to accelerate in the second half of fiscal 2025 as more capacity comes online to serve AI demand’, they noted.
Gerrit Smit, manager of the Stonehage Fleming Global Best Ideas Equity (BCLYMF3) fund, thinks Microsoft has once again proven itself as the go-to steady vehicle for investing for the digital revolution, ‘with group revenue growing at +15%, Azure Cloud revenue at +29% and the AI contribution sequentially increasing each quarter.’
‘Microsoft has the balance sheet and the cash flow to keep investing heavily and staying ahead of the AI curve’, Smith said.
Ben Barringer, technology analyst at Quilter Cheviot, largely agrees, noting ‘solid bookings and backlog’.
‘The company emphasised that they are making investments driven by demand and ensuring solid returns on these investments. The guidance provided was strong, reflecting confidence in its comprehensive product offerings.’
‘But patience is required as data preparation and AI integration into business processes take time. Overall, this set of numbers should be reassuring and help alleviate some fears of a significant AI downturn’, Barringer said.
