Microsoft Earnings: Good Result Punctuated by Strong AI Demand Within Azure

Wide-moat Microsoft continues to impress with solid second-quarter results, including upside on both the top and bottom lines. Even though management will not admit as much, we continue to see indicators that the demand environment has improved at least modestly. Artificial intelligence stole the show again this quarter as it contributed 600 basis points to Azure growth, twice the contribution from just last quarter, and helped land larger and longer-term Azure deals. Azure growth, then, was meaningfully better than expected. We find Microsoft’s outlook encouraging, especially for Azure. These factors drive us to raise our revenue growth and margin estimates by approximately 1 percentage point each over the next five years, which increases our fair value estimate to $420 per share from $370. Despite this increase, we see the shares as fairly valued.