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

Microsoft Stock at a Glance

• Fair Value Estimate: $360.00
• Morningstar Rating: 3 stars
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Wide

Microsoft Earnings Update

Wide-moat Microsoft MSFT 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.

AI Demand Building for Microsoft

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.

We see results as reinforcing our long-term thesis centering on the proliferation of hybrid cloud environments and Azure, as the firm continues to use its on-premises dominance to allow clients to move to the cloud at their own pace. We center our growth assumptions around Azure, Microsoft 365 E5 migration, and traction with the Power Platform for long-term value creation. We also see a new growth avenue emerging in the form of AI, where Microsoft is positioned as a clear leader.

Microsoft Cloud continued to grow nicely, driven by Azure strength, and was up 21% year over year in constant currency to $33.3 billion. Growth here was consistent, with the 22% achieved in each of the last two quarters, which, taken together, we view as continued signs of stabilization. Azure grew 27% year over year in constant currency, versus guidance of 26%-27%. Importantly, management noted that more than 50% of the $110 billion commercial cloud revenue was from Azure, which is consistent with our long-running estimate that now reads $58 billion. AI added about 100 basis points of growth to Azure performance and is expected to add 200 basis points of growth in the first quarter. Management continues to point to lapping challenging comparisons for Azure as elevated workload optimization trends ease beginning in the first quarter, carrying on throughout fiscal 2024. Commentary from Amazon is consistent with this. Management also noted good deal activity for Azure, which we think bodes well for the next couple of years.

For the June quarter, revenue grew 8% year over year as reported, or 10% in constant currency, to $56.19 billion, compared with the midpoint of guidance of $55.35 billion. Relative to the year-ago period (as reported), productivity and business processes grew 10%, intelligent cloud grew 15%, and more personal computing, or MPC, declined 4%. Compared with guidance, all three segments were slightly ahead of the top end of the guidance ranges. Good sales execution helped drive solid renewals once again. Additionally, AI is already helping drive overall demand, which we expect to accelerate over the next couple of years.