Microsoft reported its fiscal second quarter 2024 earnings on January 30th, beating Wall Street estimates and showcasing the company’s continued success in cloud computing and artificial intelligence.
Key Takeaways
- Revenue was up 18% year-over-year to $52.7 billion
- Net income jumped 19% to $16.4 billion
- Azure cloud revenue grew 31%, driving overall Intelligent Cloud segment growth of 19%
- The Productivity and Business Processes segment, which includes Office and LinkedIn, was up 7%
- Demand for AI offerings like Copilot and Bing powered significant growth
“This quarter shows how AI investment is paying dividends across our stack and playing an invaluable role in driving revenue growth,” said Satya Nadella, Microsoft CEO. “Whether it’s optimization recommendations in Azure, next word predictions in Office, or more relevant search results in Bing, organizations of all sizes are benefiting from our AI innovations.”
Shares initially dipped after earnings but then rebounded, putting Microsoft back on track to soon surpass Apple as the world’s most valuable company.
Surging Demand for Cloud and AI
Microsoft has staked its future on the cloud and AI, pouring resources into those strategic areas over the past several years. That investment paid off handsomely last quarter.
Azure, the company’s flagship cloud platform, posted revenue growth of 31% as more businesses shifted their workloads to the cloud. Azure’s expanding capabilities in machine learning, analytics, and other next-generation technologies makes it an attractive option relative to alternatives.
“Azure is becoming the preferred destination for any organization that wants to rapidly innovate with AI while optimizing costs,” said Daniel Ives, an analyst at Wedbush Securities. “The cloud arms race with Amazon will define the technology landscape over the coming decade.”
Demand for AI services on Azure as well as standalone offerings like GitHub Copilot led AI-specific revenue to double year-over-year.
Tools like Copilot that generate code using large language models have proven especially popular with developers. Microsoft is now integrating similar models into products like IntelliSense in Visual Studio to boost productivity.
“Whether through Azure or tools like Copilot, we provide the most powerful and responsible AI capabilities to empower every organization,” said Nadella.
Strong Commercial Business Segment
Microsoft’s Productivity and Business Processes segment, which includes Office 365, Dynamics 365, LinkedIn and other commercial products, posted 7% growth.
Office commercial revenue was up 7%, signaling that the dominance of Microsoft’s productivity suite remains firmly intact even with remote work trends beginning to taper off. 60 million Microsoft Teams users highlights how embedded the collaboration app has become in business workflows.
LinkedIn revenue grew at a double-digit percentage, benefiting from strong demand for digital advertising and job listings. Microsoft pointed to AI-powered features like skills analysis for members and automated messaging as key engagement drivers on the social network for professionals.
Shares Poised to Lead Big Tech
Microsoft stock initially dropped 3% after hours on Tuesday despite the strong earnings beat. Investors showed concerns around margins dipping slightly due to ongoing investments in cloud infrastructure.
However, shares quickly rebounded on Wednesday as analysts overwhelmingly reiterated bullish calls. The consensus is that Microsoft’s spend now in key growth areas will pay off considerably in the long run.
“Nadella and team moved the fastest and furthest into the AI space over the past several years, investing massively in next generation opportunities that will expand their total addressable market by trillions of dollars over the coming decade,” Ives wrote in a research note, assigning a price target of $400 to the stock.
Microsoft continues to trade at a significant discount to other tech titans relative to its growth rate. That suggests substantial upside for the stock as the company steadily takes cloud computing and enterprise AI market share.
Battling for Cloud Dominance
Microsoft still trails rival Amazon Web Services in overall cloud infrastructure revenue, but is quickly closing the gap. AWS cloud growth slowed to 20% last quarter compared to 50% two years ago.
That slowing momentum for AWS paired with Azure’s steady surge bodes well for Microsoft’s chances of one day seizing the cloud crown. Nadella highlighted Microsoft’s technical edge in areas like confidential computing as a key competitive differentiator going forward.
Analysts widely expect that over the next five years, Microsoft will leverage the synergies between its cloud platform and AI capabilities to become the world’s most valuable company, potentially reaching a $4 trillion market cap twice the size of Apple’s today.
Outlook Remains Strong
Microsoft anticipates revenue this quarter between $52.35 billion and $53.35 billion. For the full 2024 fiscal year, executives raised guidance by nearly $2 billion at the midpoint on expectations of sustained momentum across the cloud, AI, and commercial software.
Concerns around an economic slowdown have recently weighed on tech stocks. But Microsoft believes that secular trends around digital transformation and AI adoption will continue powering double-digit growth independent of macroeconomic conditions.
Nadella concluded his prepared remarks expressing optimism: “The next major wave of computing is being born, with AI at the core. And as organizations accelerate their digital transformation, Microsoft is poised to lead and create further value for every customer.”
Microsoft vs. Competitors at a Glance
| Company | Market Cap | Revenue Growth | Net Income Growth | AI Revenue %* | Cloud Revenue %* |
|---|---|---|---|---|---|
| Microsoft | $1.9 trillion | +18% | +19% | ~15% | ~35% |
| $1.2 trillion | +1% | -27% | ?? | ~9% | |
| Amazon | $1 trillion | +9% | -49% | ?? | ~52% |
*Estimated percentages of total revenue attributable to AI and cloud
With Microsoft firing on all cylinders in the key growth areas of cloud and AI, the tech titan looks positioned to dominate the enterprise technology landscape for years to come.
To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.
