【Earnings Preview】microsoft set to announce earnings on Thursday. After becoming the largest customer of nvidia's GB200, will the earnings also exceed market estimates?

Microsoft is scheduled to announce its earnings after the U.S. market closes on October 30 (Thursday morning in Japan on October 31 at 6:30). According to the market consensus, Microsoft's 2025 Q1 performance forecast expects revenue to increase by 14.2% to $64.542 billion compared to the same period last year. The EPS is expected to increase by 3.76% to $3.10 compared to the same period last year.

Microsoft Azure and Cloud
Despite the reorganization of Microsoft's three divisions, the market will continue to monitor the growth of revenue from Microsoft Azure and cloud services.

Analysts at Bernstein led by Mark Moerdler pointed out in an investor report that 'The focus of this quarter may be more on understanding the numbers than the numbers themselves. Management has reclassified the business and reorganized products and services. Cloud computing, especially Azure, is a key driver of growth, and Microsoft is the most likely candidate anywhere for Gen AI to succeed.'

Analysts at Deutsche Bank expect Azure's growth rate in the first quarter to be around 35%, and added that for Microsoft to meet investors' high expectations, it 'needs to provide outperformance and guidance on Azure without much slowdown.' Analysts are also paying attention to the changes in Azure's profit margin due to the expansion of artificial intelligence capabilities, which slightly impacted cloud profitability in the fourth quarter.

The restructuring of Microsoft's three main divisions is as follows:

Capital expenditure
The market views on capital investments are divided. Microsoft is investing $50 billion in facilities throughout the fiscal year 2024, and mentioned during the earnings report in July that it will expand investments in AI infrastructure to meet the demand for AI.

In the market, it is expected that the amount of equipment investment will reach $80 billion in fiscal year 2025. There is a perception that this will undoubtedly decrease profit margins and increase market concerns about AI revenue.

On the other hand, analysts at Goldman Sachs are more optimistic, viewing Microsoft's business expansion as a necessary investment towards a structural shift to Gen-AI that could bring significant revenue opportunities across all levels of AI technology stack.

A $14 billion stock conversion negotiation with OpenAI
OpenAI is progressing from a non-profit organization to a for-profit company, and Microsoft, its largest investor, may ultimately own a considerable amount of stock.

Since 2019, Microsoft has invested $13.75 billion in OpenAI, including a share of the startup's latest $6.6 billion fundraising round. An important focus is distributing stock to Microsoft and OpenAI employees while addressing antitrust concerns.

The relationship between Microsoft and OpenAI is complex, with both companies having close financial and technical ties. Microsoft is the exclusive cloud provider for OpenAI and uses its technology in AI application 'Copilot'.

Running AI on nuclear energy
Microsoft recently entered into a strategic agreement with the major U.S.-based nuclear power operator, Constellation Energy, agreeing to purchase all the electricity generated by the planned Three Mile Island nuclear power plant restart by Constellation Energy to support the energy demand of datacenters.

Microsoft has promised to purchase this electrical utilities for up to 20 years, but the specific financial details have not been disclosed. This is the first case where Microsoft has secured a 100% nuclear power plant for its own business operations.

Analysts believe that this decision indicates a growing interest in the nuclear energy sector from the AI industry. Nuclear energy is gaining attention as a clean and reliable energy option due to the rapidly increasing demand for power in the AI sector.

Goldman Sachs predicts that by 2030, datacenters will consume 8% of the total electrical utilities in the USA (currently at 3%).

Orders for the GB200 chip from Microsoft have surged.
According to the latest industry chain order information for Nvidia's Blackwell GB200 chip released by Ming-Chi Kuo, an analyst at Tianfeng International Securities, Microsoft is currently the world's largest GB200 customer. In the fourth quarter of this year, orders surged 3 to 4 times, surpassing the combined orders of other cloud service providers.

Microsoft plans to prioritize the introduction of Blackwell GB200 into low-temperature datacenters to actively mitigate potential impacts resulting from insufficient time for cooling system optimization.

What are the analyst's views?
On the eve of the earnings reports, analysts have differing opinions on Microsoft's outlook.

Oppenheimer's analyst adjusted Microsoft's stock rating from 'Outperform' to 'Underperform' or 'Hold' in their report, pointing out the possibility that market expectations for Microsoft's recent quarterly revenue and EPS may be too high, while increased capital and operating expenses to support AI initiatives could potentially pressure profit margins. The analyst particularly highlighted the expanding losses related to partner OpenAI as the 'biggest concern'.

On the other hand, Bank of America Securities analyst Brad Sills maintained a 'buy' rating for Microsoft and set a target price of $510. TD Cowen also remains optimistic about Microsoft, stating that steady demand and Microsoft's strategic positioning of its products and services, including new products like Copilot, are sources of confidence even as they are gradually introduced.