Microsoft Earnings: Solid Performance, With Azure Strength Offset by Margin Pressure in 2024

Wide-moat Microsoft reported solid fourth-quarter results, including upside on both the top and bottom lines. We see continued signs of encouragement in important areas like Azure, which did slightly better than our model; and Microsoft 365, which was solid, based on better-than-expected upsells and renewals. However, the outlook overall was slightly shy of our model. Further, capacity investments in front of artificial intelligence-driven demand will limit near-term margin expansion, which we think is an easy trade given the opportunity. The upshot of this is that AI demand is already materializing. Lastly, macroeconomic pressures remain, but don't seem to be worsening. We think results are solid overall, and after advancing our model to account for the firm's year-end, we lift our fair value estimate to $360 per share, from $325, and continue to view shares as attractive.