Since reaching tis all-time high of $366 in mid July, shares of Microsoft (MSFT) have fallen as much as 15%. Currently trading at around $326, the stock is still up an impressive 36% year to date, besting the 10% rise in the S&P 500 index, even with a decline of close to 10% over the past three months.
The enterprise software and cloud giant is scheduled to report first quarter fiscal 2024 earnings results after the closing bell Tuesday. Microsoft's stock outperformance, even amid the recent struggles in tech, continue to be driven by the company’s leadership position in AI, thanks to its multi-year, multi-billion dollar investment in ChatGPT developer OpenAI. More recently, the company unveiled Microsoft 365 Copilot, an AI-powered version of its productivity platform.
As a result, the software and cloud giant have been a top pick among among investors and analysts. Microsoft made no secret that AI would be a key source of its future growth. In September, while speaking at Goldman Sach's Communacopia + Technology conference, Microsoft CFO Amy Hood said that it "absolutely should be the fastest $10 billion business we've ever built” when referencing Generative AI. Ahead of the tech giant's quarterly results Tuesday, Citigroup analysts agrees.
Citing stabilization in IT budgets and a ramp up in revenue related to generative artificial intelligence, the analysts expects Microsoft to deliver "accelerating" total revenue and profitability. Its Azure cloud platform and the availability of Microsoft 365 Copilot are also expected to see growth tailwinds. As for the latter, which is priced at $30 per month, some analysts believe it can boost Microsoft’s fiscal 2025 revenue by as much as $9 billion. On Tuesday, the company’s guidance will gauge how confident its management feels about that growth potential.
For the quarter that ended September, the Redmond, Wash.-based tech giant is expected to earn $2.52 per share on revenue of $51.72 billion. This compares to the year-ago quarter when earnings were $2.35 per share on $49.61 billion in revenue. For the full year, ending June, earnings are projected to rise 5.7% year over year to $10.37 per share, while full-year revenue of $222.33 billion would mark a year-over-year increase of 5.9%.
The company’s push into artificial intelligence by way of its $10 billion investment in Open AI is the “x-factor” in the market’s renewed optimism. AI is expected to fuel Microsoft’s market share among enterprise customers, not only for cloud adoption but also in its search capabilities. OpenAI recently updated its popular ChatGPT chatbot, bringing the "Browse with Bing" feature to all users. The app is now linked to the internet and offers browsing capabilities via Microsoft’s Bing for all users.
It remains to be seen how much traction Bing generates, compared to Google, but Bank of America analyst Brad Sills who has a Buy rating on the stock and $405 price target, loves Microsoft’s strategy. In a recent note to investors, Sills said he expects Microsoft to post "modest" upside, with catalysts coming later in the year. Citing recent checks, Sills said he sees "sustained, healthy" new workloads for Azure.
In the Q4, the company earned $2.69 per share, topping Wall Street estimates by 14 cents, while revenue of $56.2 billion rose 8.34% year over year, surpassing estimates by $700 million. Revenue was driven by 26% rise in Intelligent Cloud revenue to $24 billion, while revenue from Productivity and Business Processes, which includes Office commercial and consumer products and cloud services, rose 12% year over year to $18.3 billion.
Microsoft’s performance and execution makes the stock a must-own for any portfolio. Microsoft stock has the potential to reach $500 per share, if or when Copilot adoption reaches double-digit percentage growth annually, and AI development becomes a normal enterprise line item expense.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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