Microsoft: ChatGPT Bet, Azure Revenues in Focus Ahead of Key Earnings Report

Microsoft (NASDAQ:MSFT) is scheduled to release its quarterly earnings report on Tuesday, October 24, after market close. In recent days, the company has been at the center of attention, marked by several significant developments.

On the positive side, the tech giant recently completed its acquisition of the video game publisher Activision Blizzard (NASDAQ:ATVI) following an extensive regulatory battle with competition authorities in the USA, Europe, and the UK.

In less favorable news, it was disclosed last week that the Internal Revenue Service is proposing a substantial $29 billion settlement to Microsoft as part of a tax audit that covers the period from 2004 to 2013.

Nonetheless, what investors are most eagerly anticipating are the quarterly results to be revealed next Tuesday. These results will be pivotal in shaping expectations for Microsoft's performance for the remainder of the year.

Microsoft Earnings: What to Expect?/h2

As InvestingPro points out, the analyst consensus forecasts sales of $54.5431 billion, which would represent annual growth of 8.7%. EPS is expected at $2.65, up 12.8% on the same quarter last year.

Source : InvestingPro

There have been 20 upward revisions to EPS forecasts, and only 4 downward revisions in the last 90 days.

It is also interesting to note that Microsoft exceeded expectations in terms of both earnings and sales in its last quarterly publication.

Source: InvestingPro

Historically, Microsoft has a strong propensity for exceeding analysts' expectations.

Source: InvestingPro

Indeed, EPS has exceeded expectations in 6 of the last 8 quarters, as have revenues.

Azure and AI Integration in Focus/h2

Beyond these headline figures, investors will be keeping a close eye on results from Azure, one of Microsoft's key growth drivers. Last quarter, Azure revenues posted a 26% year-on-year increase, marking the 5th consecutive quarter of deceleration.

It will also be important to pay attention to the company's comments on AI integration. Since announcing a $10 billion investment in ChatGPT, Microsoft has flourished in the development of AI in Azure.

The company announced that ChatGPT was available as a preview in Azure OpenAI Service in early March, and has extended the service to wider applications and regions over the past six months.

The most important development was the announcement of Microsoft 365 Copilot, an artificial intelligence add-on to core software such as Word and Excel. Office accounts for around 24% of the tech giant's sales, and grew by 16% year-on-year in the previous quarter.

Therefore, in addition to Azure the performance of Microsoft's other cloud services, as well as Office 365, will be key elements to watch.

However, it's important to remember that Microsoft CFO Amy Hood has stated that the growth of AI services will be gradual, with the financial effect felt most in the second half of fiscal 2024, i.e. the first half of calendar 2025.

In this regard, it's worth noting that analysts at Morgan Stanley recently expressed a similar view, declaring themselves "firmly convinced that a great opportunity lies ahead for Microsoft in generative AI and that the company is well positioned to seize this opportunity".

They cautioned that "investors should keep in mind the timing of corporate adoption cycles", thus suggesting that it's still too early to expect to see an impact.

What's Next for MSFT Stock?/h2

Finally, when it comes to analysts' and valuation models' outlooks for Microsoft shares, the picture is mixed.

In fact, the 51 analysts surveyed by InvestingPro who follow MSFT shares have an average 12-month target of $394.62, i.e. a 20% upside potential.

Source : InvestingPro

In contrast, Microsoft's InvestingPro fair value, which synthesizes 14 recognized valuation models, stands at $334.03, just a few dollars above the current share price.

Source : InvestingPro

However, InvestingPro also shows that Microsoft is a stock that can be considered safe, with a financial health score of 3.64, the highest among comparable companies.

Conclusion/h2

To sum up, the forthcoming quarterly results look solid overall. In detail, Azure's performance and AI integration will be the focus beyond the main financial metrics. However, it should be noted that although analysts are anticipating a 20% rise in the share price, valuation models offer a more conservative estimate.

Nonetheless, Microsoft's strong financial health, as well as its solid track record of exceeding expectations, inspire confidence.

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Disclaimer: The author does not own any of these shares. This content, which is prepared for purely educational purposes, cannot be considered investment advice.