Microsoft (MSFT) Intelligent Cloud Revenue Improvement Key To Growth

Market will continue to look for signs that Big Tech companies have make massive wave of AI investments and when will these investment pay off or begin to show returns.

For this fiscal quarter, Microsoft is expected to report earnings per share of $2.94 on revenue of $64.5 billion, same period last year, Microsoft reported EPS of $2.69 on revenue of $56.2 billion.

The revenue from Cloud revenue would have $36.8 billion coming from its Intelligent Cloud which includes Azure revenue expected at $28.7 billion. During the last reported quarter, Microsoft announced that AI services contributed 7 percentage points of growth to its Azure and other cloud services revenue.

That was up from 6 percentage points in Q2 and 3 percentage points in Q1. The company initially began reporting AI contributions in Q4 of last year, saying AI added 1 percentage point of growth to Azure at the time.

Some analysts have predicted that the revenue contribution from Google’s AI spending might not reap benefit until the first half of 2025 at the earliest.

Will this be the case for Microsoft as well? I would like to share how I see the Cloud AI revenue could come from.

The Cloud AI services offered by Microsoft, Google and Amazon could be grouped under Cloud AI Developer Services (CAIDS).

So why do we need to be concerned and take note of CAIDS? This is because the CAIDS landscape is rapidly evolving as artificial intelligence continues to revolutionize how we build applications.

Building, deploying, and managing machine learning (ML) and artificial intelligence (AI) models is made possible for software developers who are not data scientists via cloud-hosted or containerized services and solutions known as Cloud AI Developer Services. These services are intended to facilitate the integration of AI capabilities into solutions and apps, therefore opening up the process to developers with less experience in data science.

Pre-trained models, modifiable models, and ML model development, deployment, and management tools are among the many features that CAIDS usually offers. Many times, these services give developers a platform to take use of AI capabilities without needing to have deep knowledge in AI or machine learning. This keeps developers able to concentrate on their main skills while nevertheless utilizing AI's potential in their apps.

Leading cloud providers with their own suites of AI developer services are Amazon Web Services (AWS), Microsoft Azure, and Google Cloud Platform (GCP), who control the CAIDS industry. Image identification and natural language processing to predictive analytics and automation are just a few of the sectors and use cases that these services are intended to serve. Cloud AI Developer Services (CAIDS) is a cloud-based service that enables software developers to create, implement, and maintain AI and ML models, hence increasing the accessibility and applicability of AI in a wider variety of sectors.

For the fifth year in succession, Microsoft and Google have been recognized as Leaders in the Magic Quadrant for Cloud AI Developer Services. This accolade is a testament to their relentless pursuit of innovation and enhancement in AI products and services.

The CAIDS market is witnessing substantial growth, propelled by the escalating adoption of AI capabilities across diverse industries. This upward trend is anticipated to persist, with prominent enterprise software providers augmenting their offerings and underscoring the significance of data quality in implementation.

Vendors of Cloud AI developer services are formulating an array of foundational models spanning language, vision, tabular, and AI capabilities. These models are engineered to provide a robust foundation for the construction and deployment of AI applications.

Amazon Web Services (AWS), Google, Microsoft, and IBM are positioned as leaders. They exhibit both a complete vision and high ability to execute. These companies offer robust AI services, extensive APIs, and seamless integration with cloud infrastructure.

Amazon Web Services (AWS): Offers a comprehensive suite of AI services, including SageMaker, Rekognition, and Lex.

Google: Remains strong with TensorFlow, AutoML, and AI Platform, emphasizing accessibility and democratization of AI.

Microsoft: Integrates AI capabilities seamlessly into Azure with services like Azure Machine Learning and Cognitive Services.

IBM: A leader with a rich history in AI research and enterprise solutions.

So how will these leaders begin to differentiate from one another would be the capabilities to offer faster, seamless and one stop solutions for AI deployment?

Only then we would see the shorter period of return on investment from the AI, this is something that we as investors would need to look at when Big Tech companies report their earnings for this quarter and the following few quarters in 2024.

If we were to look at the number of organization already on Azure, we could see that they are the next preferred cloud provider after Amazon. With their integration with OpenAI, there are more and more companies exploring how they can bring these services to their end users.

So I foresee that the demand for Microsoft cloud services should help to boost their revenue already as companies has adjust their budget spending.

Based on 27 Wall Street analysts offering 12 month price targets for Microsoft in the last 3 months. The average price target is $507.64 with a high forecast of $600.00 and a low forecast of $465.00. The average price target represents a 18.96% change from the last price of $426.73.

If we have been following the news on Microsoft, the recent rotation does not seem to have much impact on Microsoft, but the key pressure that is facing Microsoft is the AI revenue and spending.

Especially on the investment they have on OpenAI, will we start to see Microsoft reaping the benefits from this investment?

From the technical, Microsoft is showing a mixed signal before its earnings, as MACD is showing a downside trend, while KDJ is trying to form an upside potential.

I would think the market is still cautious of the rotation because this might derail good earning as we have seen it happened last week to Alphabet.

So I would think it would be better to monitor the price action for Microsoft leading to its earnings and trade accordingly.

At time of this writing, Microsoft is down -0.34% on the 24-hours trading.

Microsoft could see an improvement from its cloud revenue with significant contribution from its intelligent cloud azure, but the earnings result might be derailed by the rotation which is still lingering around.

So I would not want to expect a positive move from Microsoft following its earnings, unless we can see that the rotation is fading away.

Appreciate if you could share your thoughts in the comment section whether you think Microsoft would post a better revenue from its intelligent cloud?

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.