Microsoft (MSFT) shares plunged 10% last Thursday following its quarterly earnings report on concerns about its AI spending and lower-than-expected growth for its Azure cloud services.
As of Monday, Microsoft shares were down 12% from their closing price on Jan. 28, the last session before the earnings report was released.
We asked Seeking Alpha analysts Jonathan Weber and Hunting Alpha what they thought lay ahead for the tech titan.
Jonathan Weber: Microsoft (MSFT) shows compelling business growth, but the market didn’t appreciate the heavy AI capital spending. In the coming quarters, Microsoft will have to show, or at least make convincing arguments, that these investments will pay off to ease investors’ worries. If that happens, I believe that Microsoft has a lot of upside potential, as it currently combines a below-average valuation, relative to how it traded in the past, with strong business growth momentum.
Hunting Alpha: The good news is Microsoft’s (MSFT) Office 365 Copilot is continuing to see great adoption growth, both in terms of user account/seat additions and daily user engagement habits that help build a moat from higher switching costs. The growth in average revenue per user shows monetization ramping up as well.
I expect this to continue, driving accelerated revenue growth, because the signs are already there in broad-based momentum in remaining performance obligations, or RPOs, which is a leading indicator of revenues as it represents contracted work that is yet to be done.
But there are also three key risk factors to watch out for.
First is the stability of OpenAI (OPENAI), both from a going concern perspective, given its cash-burning, funding-reliant operations, and from an AI project roadmap perspective. This is because 45% of Microsoft’s RPOs pertain to OpenAI.
Second is the extent of gross margin erosion as investments in AI infrastructure shift the business model mix a bit more toward hardware, which has lower margins than software.
The third risk factor is the replacement of server assets sooner than expected, which can increase the already high capex spending and put further pressure on FCF margins.