What Wall Street Is Saying About Microsoft Ahead Of Earnings

Analysts raising Microsoft targets as AI fuels enthusiasm

Microsoft (MSFT) is scheduled to report results of the third quarter of its fiscal year 2023 after the market close on April 25, with a conference call scheduled for 5:30 pm ET. What to watch for: 

CLOUD: 

In its fiscal second quarter, Microsoft reported revenue in its Intelligent Cloud segment was $21.5B and increased 18%, or 24% in constant currency. The company noted Azure and other cloud services revenue growth of 31%, or 38% in constant currency. “We are focused on operational excellence as we continue to invest to drive growth. Microsoft Cloud revenue was $27.1B, up 22%, up 29% in constant currency, year-over-year as our commercial offerings continue to drive value for our customers,” said CFO Amy Hood at the time of the company’s last report.

Meanwhile, Satya Nadella, chairman and CEO of Microsoft, offered: “The next major wave of computing is being born, as the Microsoft Cloud turns the world’s most advanced AI models into a new computing platform. We are committed to helping our customers use our platforms and tools to do more with less today and innovate for the future in the new era of AI.”

RISE OF AI: 

In January of this year, Microsoft announced the third phase of its long-term partnership with OpenAI through a multiyear, multibillion dollar investment to accelerate AI breakthroughs.

In early February, Microsoft announced its launch of an all new, AI-powered Bing search engine and Edge browser to “deliver better search, more complete answers, a new chat experience and the ability to generate content.” Microsoft said the new Bing experience is running on a new, next-generation OpenAI large language model that is more powerful than ChatGPT and customized specifically for search. “We’ve also applied the AI model to our core Bing search ranking engine, which led to the largest jump in relevance in two decades. With this AI model, even basic search queries are more accurate and more relevant,” the company said.

Shares of Alphabet (GOOG, GOOGL) were hurt early last week by a news report saying Samsung (SSNLF) was considering replacing Google’s search offering with Microsoft’s Bing.

After learning Samsung was considering replacing Google with Microsoft’s Bing as the default search engine on its devices back in March, Google began to “panic,” Nico Grant of The New York Times reported. In response to this threat from AI competitors, Google is racing to build an all-new search engine powered by the technology while also upgrading its existing search engine with AI features, internal documents reviewed by The Times showed.

The new features, under the project name Magi, are being created by designers, engineers and executives working in so-called sprint rooms to tweak and test the latest versions, the publication said. The new search engine would offer users a far more personalized experience than the company’s current service, attempting to anticipate users’ needs.

Earlier this week, Judson Althoff, Executive Vice President and Chief Commercial Officer at Microsoft, stated in a post to the corporate blog: “This past quarter has put a spotlight on advancements in generative AI, and the possibilities of its application to deliver pragmatic business outcomes… Those leveraging the Microsoft Cloud – the most trusted, comprehensive and integrated cloud – are best positioned to take advantage of these advancements… I believe the only way to navigate uncertainty is through continued and accelerated innovation, and Microsoft itself is no exception. We have been delivering AI solutions for customers successfully over the last several years using cognitive services, machine learning, and digital twins. Moving forward, we will infuse generative AI capability into our consumer and commercial offerings to deliver copilot capability for all services that our customers know and love across the Microsoft Cloud. Additionally, we will work with our partners, start-ups, digital natives, and our customers to enable them to leverage these same capabilities in their own solutions. I am excited to see what our customers will create with generative AI in partnership with us. Together, we can apply the world’s most advanced AI models to meet business imperatives responsibly, securely, and with the confidence that can only be achieved with the Microsoft Cloud.”

TARGET HIKES AND CONSENSUS EXPECTATIONS: 

On April 19, BofA raised the firm’s price target on Microsoft ahead of the company’s fiscal Q3 report. The firm expects weaker PCs to weigh on the topline, though it views this as “a temporary macro headwind” and notes Windows comparisons “improve significantly” in Q4. BofA added that it continues to view Microsoft as one of a few companies with “the three key components required for AI success,” namely compute scale via Azure and O365, data scale and data management and engineering expertise.

Meanwhile, Citi raised the firm’s price target on Microsoft. “Amidst a rich catalyst path” of generative artificial intelligence monetization, Microsoft has a “relatively uneventful” fiscal Q3 setup as numbers are more likely to be negatively impacted by macro and IT spending headwinds, the analyst tells investors. Citi’s reseller checks and conversations “trended more constructive” this quarter with better quota achievement and growth trends verses Q2. That said, the firm is baking in incremental caution on Azure consumption with ongoing optimization headwinds.

The next day, KeyBanc raised the firm’s price target on Microsoft. Survey data from 33 value added resellers, or VARs, and channel partners indicated roughly stable Q1 results relative to plan versus last quarter and a relatively stable 2023 IT budget outlook. KeyBanc further noted several Microsoft partners were optimistic on growth stabilizing or even up from Q1, but the firm remains cautious on calling the trough.

ACTIVISION AND ANTITRUST: 

As previously announced, Microsoft has agreed to acquire Activision Blizzard (ATVI) for $95 per share in cash.

On March 24, the U.K. Competition and Markets Authority, or CMA, announced it has “received a significant amount of new evidence in response to its original provisional findings.” The CMA added: “Having considered this new evidence carefully, together with the wide range of information gathered before those provisional findings were issued, the CMA inquiry group has updated its provisional findings and reached the provisional conclusion that, overall, the transaction will not result in a substantial lessening of competition in relation to console gaming in the UK. The most significant new evidence provided to the CMA relates to Microsoft’s financial incentives to make Activision’s games, including Call of Duty, exclusive to its own consoles. While the CMA’s original analysis indicated that this strategy would be profitable under most scenarios, new data, which provides better insight into the actual purchasing behaviour of CoD gamers, indicates that this strategy would be significantly loss-making under any plausible scenario. On this basis, the updated analysis now shows that it would not be commercially beneficial to Microsoft to make CoD exclusive to Xbox following the deal, but that Microsoft will instead still have the incentive to continue to make the game available on [Sony’s] PlayStation… The CMA’s merger investigation continues, and it remains due to issue its final report by 26 April 2023.”

Following the news, Sony (SONY) said that the U.K. Competition and Markets Authority’s reversal of its position on Microsoft’s proposed takeover of “Call of Duty” maker Activision “surprising, unprecedented, and irrational,” The Verge’s Tom Warren reported.

Earlier this week, Javier Espinoza of Financial Times reported that Microsoft has offered to stop forcing customers of its Office software to also have its Teams video conferencing and messaging app automatically installed on their devices to hopely prevent an official antitrust probe by EU regulators following a 2020 complaint by Salesforce’s (CRM) Slack. The sources, who stressed talks are still ongoing and a deal is not certain, said the move was part of an effort by Microsoft to try to avoid what would be its first antitrust probe in more than a decade.

SENTIMENT: 

Click here to check out recent Media Buzz Sentiment on Microsoft as measured by TipRanks.

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Originally Posted April 24, 2023 – What Wall Street is saying about Microsoft ahead of earnings