Microsoft cloud growth, genAI, segment changes in focus for Q1 earnings

Microsoft (NASDAQ:MSFT) will give investors a lot to digest during its earnings call next week, which will likely highlight Azure cloud growth, advances in generative artificial intelligence and new investor metrics.

It is the first quarter featuring Microsoft’s recent updates to investor metrics and segment changes in its reporting practices. The changes should provide a cleaner look at its Azure segment.

“This quarter the focus could be more on understanding the numbers than the numbers themselves,” said Bernstein Société Générale Group analysts, led by Mark Moerdler, in an investor note. “Management has re-segmented the business, moving products and services around, which is going to make it more difficult for investors to easily understand the results. Fundamentally nothing has changed other than the reporting — Cloud and especially Azure is a big driver of growth and if Gen AI is successful anywhere Microsoft is the most likely candidate.”

Seeking Alpha analyst Yuval Rotem pointed out that despite Microsoft emerging as an early winner in the AI revolution, it has underperformed in 2024, leading investors to be more cautious on the stock. One primary point of concern is the high capital expenditures on AI.

In a recent analysis, Rotem points out significant growth in the Azure segment.

“This is a segment that grew at a 21% CAGR since 2017, while operating margins expanded by 14 percentage points, approaching 50%,” Rotem said. “After the recent changes, growth in this segment should accelerate to over 30%, while margins will decline.”

Microsoft’s Productivity and Business segment has grown at a 14% compound annual growth rate over the same time frame. Meanwhile, the More Personal Computing segment grew revenue at a 7% CAGR. Rotem noted this slower growth is related to an industry-wide slowdown in gaming, which is the largest component of this segment.

“With one of the widest moats in history, and a future of mid-teens earnings growth, buying Microsoft at a 30x multiple is attractive in my view,” Rotem added.

Microsoft continues to create new ways to monetize AI. Next month, it is introducing autonomous AI agents, allowing clients to build their own in Copilot Studio and Dynamics 365. These agents can work in sales, service, finance and supply chain teams.

“Right now, the market has priced in that Microsoft is going to have lower growth rates going forward than it has in the past, which is what most companies typically have, but I see Microsoft in an exceptional position to outperform,” according to Seeking Alpha analyst Tangerine Tan Capital. “There are many opportunities for Microsoft to benefit from AI, whether it’s Office products, search market share, the cloud, or even AI agents that perform everyday tasks.”

Microsoft is scheduled to release its first quarter fiscal 2025 financial results after the bell rings on October 30. A consensus estimate calls for Microsoft to report earnings per share of $3.10 on revenue of $64.56B.