Scrutiny Over Microsoft’s AI Investments
There’s mounting pressure on Mister Softee, otherwise recognized as Microsoft (MSFT), as the software titan is set to announce its earnings following Tuesday’s market closure.
The driving factor: Investors are beginning to pose a fundamental query pertinent to any corporation investing millions—or, more realistically, billions—into artificial intelligence: When can we expect tangible returns from this expenditure?
It’s imperative that the AI investments generate profits; otherwise, they risk being questioned.
“Investors will be closely monitoring Microsoft’s capacity to sustain revenue growth, particularly the AI-related segment. Should there be a failure to accelerate revenue and capital expenditures persist, investor sentiment may turn negative,” expressed Gil Luria, a senior software analyst at D.A. Davidson, to Reuters this week.
Therefore, Microsoft’s and CEO Satya Nadella’s objective post-Tuesday’s results is to demonstrate the substance behind its substantial AI wager. The stock wrapped up Monday at 6.73, reflecting a 1.5% uptick for the day and a 13.5% rise in 2024.
However, the stock price has decreased by 8.9% from its zenith of 8.35 on July 5. To be fair, it was perhaps unrealistic to expect Microsoft shares to replicate their 2023 performance, which saw an increase of 53.6%.
We may just discover an indication of that “substance” on Tuesday. The firm is anticipated to announce a fiscal fourth-quarter revenue of .2 billion, marking an approximate 14% increase from the prior year but a decline from 17% in the fiscal third quarter, which concluded at March’s end. Earnings, projected at .90 a share, would represent an approximate 8% rise year-over-year.
The inquiry regarding AI is likely to emerge when revenue for Microsoft’s Intelligent Cloud segment is disclosed. As Microsoft’s largest business division, this segment encompasses its cloud computing applications and associated technologies, with AI being pivotal to its future.
In the same quarter last year, Microsoft reported a 15% growth in its Cloud division, totaling billion. Subsequently, the company stated that 7% of that uplift was attributable to AI. Moreover, Microsoft noted an investment of .7 billion to bolster “demand for our cloud and AI solutions.”
On another note, Microsoft has committed billion to OpenAI, the startup playing a significant role in initial AI developments, and is ready to invest further.
Thus, the focus will rest on how much Microsoft’s cloud sector will expand this year and whether the AI-related growth percentage exceeds that of the previous year.
Numerous investors will be looking for revenue growth well above 15% and a greater AI contribution than last year.
One can expect intensified scrutiny regarding these metrics during the company’s analyst call at 2:30 p.m. PT (5:30 p.m. ET). Nadella and Chief Financial Officer Amy Hood will participate in the call.
A shortfall could unsettle investors. This anxiety stems from the market enthusiasm for AI in early 2024, which raised concerns that tech stocks were surging too quickly.
By June 18, Nvidia (NVDA) shares had risen as much as 174% this year—excessive for numerous shareholders who chose to lock in their gains. The shares have since dropped by 17.6%.
The Broader Landscape of Tech Earnings
This week is critical for the technology sector, with multiple industry giants slated to announce their earnings. The focus is not solely on Microsoft; other titans such as Advanced Micro Devices (AMD), Meta Platforms (META), Arm Holdings (ARM), and Qualcomm (QCOM) are also scheduled to report. These firms will disclose their financials on Wednesday, while Apple (AAPL), Amazon.com (AMZN), and Intel (INTC) will do so on Thursday.
For Australian investors, the performance of these tech giants is particularly significant. The Australian market frequently reflects U.S. trends, and any notable fluctuations in these stocks could create ripple effects domestically. The tech sector has substantially influenced global market movements, with any instability potentially causing volatility for the ASX.
The concentration will particularly be on how these corporations are navigating the AI landscape. Nvidia’s (NVDA) dramatic ascent followed by a correction emphasizes the market’s responsiveness to AI-related news. Investors will be eager to determine if other tech firms can maintain their growth paths amid the AI excitement.
Alphabet’s (GOOGL) recent earnings miss, attributed to concerns over AI spending, offers a cautionary example. The stock’s 6.7% decline following the earnings report highlights the market’s unforgiving nature when expectations are not met. This sentiment is likely to cast a shadow over forthcoming earnings announcements, with investors closely analyzing every aspect related to AI investments and returns.
Microsoft’s performance will serve as an indicator for the sector. With a net profit margin of 35%, the company remains a formidable player. However, its dependence on subscription services like Office products and the fluctuations in Windows software sales to PC manufacturers will be scrutinized. Any indications of a slowdown in its personal computing division could alarm investors.
As the earnings season progresses, Australian investors should prepare for potential market fluctuations. The tech sector’s performance will play a crucial role in shaping broader market sentiment, and any surprises—be they positive or negative—could have significant ramifications for portfolios locally.
