Microsoft's (MSFT) Azure Cloud Prowess to Boost Q3 Earnings

Microsoft’s MSFT third-quarter fiscal 2024 results, scheduled to be reported on Apr 25, are likely to be driven by the consistent growth in its cloud platform, Azure.

For the fiscal third quarter, Microsoft expects Intelligent Cloud revenues (Azure falls under the segment) between $26 billion and $26.3 billion.

Our model estimate for Intelligent Cloud revenues is currently pegged at $26.01 billion, indicating 17.8% growth from the figure reported in the year-ago quarter.

Microsoft Corporation Price and EPS Surprise

Microsoft Corporation Price and EPS Surprise

Microsoft Corporation price-eps-surprise | Microsoft Corporation Quote

Azure's Continued Growth to Propel MSFT's Top Line in Q3

Microsoft is witnessing robust demand for its cloud infrastructure monitoring, web-based application performance management and human capital management solutions. This demand is fueled by the increasing migration of workloads to the cloud.

During the fiscal second quarter, Azure and other cloud services revenues grew 30% (up 28% at cc), including roughly 6 points from AI services, which was higher than the previous quarter's 29% (28% at cc). In Azure, Microsoft expects revenue growth at cc to remain stable in the fiscal third quarter, with increasing contributions from all Azure AI services. Additionally, the company's per-user business is expected to have benefited from the momentum in the Microsoft 365 suite.

In the to-be-reported quarter, MSFT announced the expansion of its collaboration with Oracle ORCL to meet growing customer demand for Oracle Database@Azure with five more regions, which brings the total planned multi-cloud availability footprint to 15 regions globally.

Azure's increased availability in more than 60 announced regions globally is expected to have strengthened the tech giant's competitive position in the cloud computing market, dominated by Amazon’s AMZN cloud division, Amazon Web Services (“AWS”), and Alphabet GOOGL-owned Google Cloud.

In the last reported quarter, AWS revenues (14% of sales) rose 13% year over year to $24.2 billion, with operating income of $7.2 billion, up 37.7% year over year. The expansion of AWS' portfolio has been helping Amazon maintain its dominance in the cloud domain by gaining more customers.

Alphabet's Google Cloud revenues rose 25.7% year over year to $9.19 billion, accounting for 10.6% of the quarter’s total revenues. Google Cloud reported operating income of $864 million against a loss of $186 million in the year-ago quarter.

Azure AI Gives MSFT Competitive Edge in Generative AI Market

Microsoft has tightly integrated OpenAI's GPT-4 language model into its Bing search engine and Edge browser, delivering a ChatGPT-like experience to users. The Azure OpenAI Service enables developers to easily incorporate large language models and generative AI into applications across various use cases.

In the fiscal second quarter, MSFT witnessed solid adoption of Azure AI, which now has a clientele of more than 53,000 customers. More than one-third of customers are new to Azure over the past 12 months.

The company has launched copilot templates that allow retailers to build personalized shopping experiences and streamline store operations using generative AI. Microsoft and OpenAI are collaborating on an advanced data center project to meet the immense computational demands of complex generative AI tasks.

Despite these cutting-edge AI moves, shares of this Zacks Rank #4 (Sell) company have gained 10% year to date compared with the broader Zacks Computer and Technology sector’s 11.1% growth amid intensifying competition from Amazon and Alphabet as they are all making aggressive moves to expand their generative AI capabilities.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

AWS is leveraging AMZN’s Bedrock, which provides access to high-performance foundation models from AI firms through an API. Alphabet’s Google has been swiftly iterating its language models, releasing the Multitask Unified Model and Pathways Language Model to bolster its search capabilities with generative AI.

The launch of enterprise capabilities of Azure OpenAI and Copilots across Microsoft 365, Dynamics 365 and Power Platform is expected to be a game changer. New Azure AI Studio is becoming the tool of choice for AI development in this new era, helping organizations ground, fine-tune, evaluate and deploy models, and do so responsibly.

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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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