Microsoft ‘has taken the AI mantel from Google’—and now it’s coming for Amazon in the cloud

Opinion: Microsoft and Alphabet results show Wall Street only cares about AI

Bernstein analyst Mark Moerdler was encouraged by Microsoft’s talk of planned sequential increases in capital expenditures during fiscal 2024. He took that commentary to mean that Alphabet’s management has decent visibility into cloud revenue increases for later in the fiscal year.

“We also see this as an indicator that Microsoft has taken the AI mantel from Google and that Azure could become a bigger and more important hyperscale provider than AWS,” he wrote, in reference to Amazon.com Inc.’s
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cloud-computing business. “If this trend continues, then AI will be a very large driver of the size of Azure’s long term revenue and will require re-evaluation up of how big Azure could be.”

In his view, “Microsoft is such a strong company to own because it has multiple legs to stand on.” The company “succeeded in firing up [its] Cloud and AI growth engines” to stand out against peers suffering from consumption issues, he wrote, while maintaining an outperform rating and boosting his price target to $406 from $400.

Shares of Microsoft were up 4% in premarket trading Wednesday.

Analysts had been looking for signs of a bottom in the cloud business, and Microsoft’s results suggested to Evercore ISI’s Kirk Materne that the “‘traditional’ consumption business is stabilizing.”

What’s more, while Microsoft is only in its fiscal second quarter, management offered commentary on cloud trends for the second half of the fiscal year. “In our view, the fact that Microsoft is even willing to provide an early look out to H2 for Azure (~26% in [constant currency]) is a good sign that the business is on stronger footing today” versus six to 12 months ago, he said.

“While the macro backdrop could remain an overhang in the near-term, we believe that the results essentially confirm that Azure growth has found a ‘new normal’ and the narrative should only get stronger in CY24 with M365 Copilot going [into general availability] on 11/1 and Activision broadening Microsoft’s opportunity in the gaming market,” Materne wrote, as he stuck with his outperform rating and $400 target price on the stock.

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Brent Thill of Jefferies titled his note to clients: “First Showers of CY24 AI Storm.”

He commented that AI tailwinds for Azure “outsized continued optimization headwinds,” while Microsoft’s commentary on AI trends pointed to “real demand, which should sustain double-digit [organic revenue] growth.”

He continues to see Microsoft shares as his “franchise pick,” rating them at buy with a $400 target price.

Guggenheim’s John DiFucci stuck with a more measured stance, albeit one he seems to realize isn’t in line with the market view these days.

“While we share in the excitement and recognition of value of AI primarily to users, but also to some vendors (including Microsoft), we wonder about the timing and magnitude of the monetization benefit, both in revenue and profit,” he wrote, even though “it doesn’t matter what we think” and rather “only matters what the market thinks.”

“We do think Microsoft will benefit given its monopolist status in Productivity Suite software,” he continued. “We can easily multiply the list price of Copilot times the number of users of commercial O365 to get the potential benefit, but the realized benefit and the timing of it is much harder in our opinion, though our conversations with investors seem to consider that as way too conservative. Maybe it is. We’re okay with that.”

DiFucci rates the stock at neutral.