Microsoft working on boosting cost efficiencies, increasing Azure growth: Citi
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Microsoft (NASDAQ:MSFT) was in focus on Tuesday as Citi said the tech giant is working on boosting cost efficiencies in its various businesses, and re-accelerating its all-important Azure unit.
Shares were down fractionally in premarket trading.
“We walked away feeling that management had good confidence in the 2H Azure reacceleration and ramping supply of capacity, which should ease current constraints,” Citi analyst Tyler Radke wrote in a note to clients, regarding a meeting he had with Microsoft’s investor relations team and several division CFOs.
“The theme of cost optimization/efficiency was common throughout each meeting and gave us confidence the company can continue to maintain strong earnings growth through the AI investment cycle,” Radke, who has a Buy rating and $497 price target on Microsoft, continued. “Overall, the meeting reinforced our positive view on MSFT, and we believe that shares can move back into favor as more evidence of GenAI monetization, including an acceleration in 2H Azure growth, takes hold.”
Delving a bit deeper, Radke said that Microsoft showed confidence that Azure can accelerate in the second-half of the fiscal year (off 32% to 33% growth in the first-half), as third-party capacity moved from the second to the third quarters and first-party capacity ramps up.
“Although there are important caveats, the supply increase may be sufficient to satisfy current demand by Q4 (and could reduce third-party spend over time),” Radke added. “The AI demand is also driving ‘halo effects’ as customers come for AI services but ‘stay’ for the platform (i.e., core Azure) that tends to be higher margin.”
Other takeaways include Microsoft’s gaming business has some of the largest near-term efficiency opportunities; the deployment of Copilots across the company has helped with both efficiency and productivity, allowing the company to do “more with the same;” and the Security business is still on a path to generate $25B in revenue.