Microsoft Earnings Analysis Reveals Bright Future

Speculation about the future of artificial intelligence (AI) has driven up more than a few tech companies’ stocks.

Nvidia is the poster child for AI investment and is up by over 200% in the past year. Founder and CEO Jensen Huang has famously stated that AI is not only disruptive as an innovation for end users but fundamentally means how hardware and software is presently built must change too.

Those stark comments have had a domino effect on a wide-range of companies, including tech behemoth Microsoft, and its ambitions to play in the artificial intelligence space via OpenAI.

So what does the future hold now for Microsoft and what did earnings reveal that may offer insights as to where its MSFT share price is headed?

MSFT Is The Largest Company In The World

Microsoft (NASDAQ: MSFT) is now the world’s largest company by market capitalization, weighing in at $3 trillion plus. While the tech giant is far from a one-trick pony, the company’s 54% 1-year return has been ignited on the back of excitement around how AI can be applied to its slew of products.

Until recently, however, most of the optimism around Microsoft has been driven by conjecture. Microsoft invested big in OpenAI, the developer of ChatGPT, a partnership that started in 2019 and has only continued to evolve. For all of the speculation, AI has yet to deliver a significant impact on Microsoft’s bottom line.

That’s why the company’s 4th quarter of 2023 earnings (fiscal 2024 2nd quarter) was so hotly anticipated. Microsoft is really the only company that has been able to deploy AI in a meaningful way on a large scale. If the results weren’t as expected, it could have major implications for the entire tech industry.

So what does the future hold for Microsoft after earnings?

MSFT Earnings Analysis

Microsoft’s earnings analysis reveals the share price has upside potential to $458.56 per share according to 49 analysts estimates.

After the company released its results on January 30, MSFT dropped almost 3%. Any disappointment investors felt was short-lived, the stock bounced back immediately and is now trading over $410. That puts Microsoft shares up 10.5% in 2024 alone.

Overall, there are very few red flags with revenue up 18% year-over-year to $62 billion, representing a 1.45% hike above what analysts expected for the quarter.

Net income was up a whopping 33% from $16.4 billion in 2022 to $21.9 billion in the last quarter of 2023. Diluted earnings per share was reported at $2.93, 5.8% better than the experts’ estimates.

Revenue from Azure, the company’s highly successful cloud platform, has been watched closely because the cloud service has high margins and has numerous potential AI applications. Azure revenue was up 30% from last year, and the Intelligent Cloud segment as a whole brought in $25.9 billion last quarter.

Microsoft credits AI for around 6% of Azure’s revenue, and that’s up from last quarter. Amazon Web Services is still the top cloud computing service, but it only grew by 13% in the last quarter of 2023. It’s certainly plausible that Microsoft’s AI-powered offering is the reason why Azure is growing at a faster clip.

Will Microsoft Stock Keep Rising?

Cloud is only one of the ways Microsoft is leveraging AI. The company just made its Copilot chatbot service available to consumers as Chatbot Pro. The virtual assistant is now available for a subscription fee to both individuals and businesses, and Microsoft hopes to see a revenue impact later in the year.

The company began offering Copilot to its Microsoft 365 customers in November for a $30 monthly fee. Individuals can access the generative AI platform for $20, and it integrates into all of the company’s popular applications like Word and Excel.

Microsoft hopes the service will be a major driver of revenue going forward, and there’s no doubt the potential is there. If Copilot is adopted even by a fraction of the company’s 400 million Microsoft 365 users, it could make a substantial difference in Microsoft’s top line.

All of the AI hoopla has glossed over the news of the long-delayed purchase of Activision Blizzard that was finalized in October. Xbox revenue was up 61% in the 4th quarter, and Microsoft attributed 55% of sales to the acquisition. The company also achieved healthy growth across its Office, Windows, LinkedIn, and advertising services.

Devices was the only segment that declined and that was expected due to slower laptop and tablet sales. That shouldn’t tarnish what was otherwise a stellar quarter for Microsoft.

Wall Street’s View On Microsoft

Wall Street is still firmly in Microsoft’s camp, even after an exceptional year for the stock.

Out of 54 analysts who have rated the stock, not a single analyst rates it as a Sell. The highest forecast among the 46 research analysts who rate MSFT a Buy is $600 per share. That means the stock would gain almost 46% over the next year.

The consensus price target translates to a 10.6% increase from where MSFT currently trades. There are 4 hold ratings on the stock, and the lowest forecast sees Microsoft shares dropping 10% to $370 per share over the next 12 months.

Is Microsoft Stock Undervalued?

Analysts still believe there’s room for MSFT to rise, and there is no shortage of catalysts that could drive the stock higher over the near future. The company’s AI investment appears to be paying off and should only pick up steam over the coming year.

Microsoft’s price-to-earnings (P/E) value is 36.87, which is higher than the tech industry average P/E of around 30x. The elevated value isn’t likely to scare away many investors, especially technology investors. For comparison, Amazon currently has a P/E nearing 60x.

Unlike Amazon, Microsoft pays a dividend to its shareholders. The current annual dividend yield of 0.73% adds up to a $0.75 per share payout to MSFT investors each quarter.

Is Microsoft Stock a Buy or Sell?

The dividend is the icing on the cake for shareholders who are intrigued by the AI potential Microsoft offers. While revenue from the new technology may not be coming fast enough for some investors, the AI impact has begun. Azure should continue to pick up market share, and Copilot has only started to make waves.

The gaming segment increased revenue dramatically, and the company continued its software segment dominance. It has also beat expectations in a quarter that was eagerly anticipated and intensely scrutinized.

The only real concern for investors is whether they missed the boat, and if the stock can keep going up. At this point, there seem to be plenty of reasons to believe that MSFT is just getting started.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.