As tech behemoth Microsoft (NASDAQ:MSFT) gears up to report fiscal fourth-quarter 2024 results on July 30, all eyes will be on the continued momentum in its high-growth cloud computing and artificial intelligence businesses. With the stock up over 14.6% year-to-date (YTD), Microsoft will need to deliver impressive numbers and guidance to justify its premium valuation.
Analysts are projecting Q4 revenue of $64.37 billion. That translates to year-over-year (YOY) growth of 14.6%. On the bottom line, earnings per share are expected to increase 9% to $2.93. The intelligent cloud segment, which includes the Azure public cloud platform, is forecast to be the key growth driver once again, with an estimated 19.5% revenue increase. Azure has been gaining market share compared to the cloud leader Amazon Web Services (AWS). It now holds 25% of the worldwide cloud infrastructure market.
Can Azure and AI Fuel Another Beat and Raise?
Microsoft’s early investments in OpenAI ignited the generative AI arms race among big tech companies. And it has continued to pour money into this field. Microsoft has deeply integrated AI capabilities across its product portfolio, from Azure to Office to Windows.
In the previous quarter, management noted that “near-term AI demand is a bit higher than available capacity,” which is a good problem to have. And, the company is aggressively moving to address it through stepped-up capital expenditures. Azure AI services were called out as a key growth contributor.
I expect this AI-driven momentum to persist in Q4, translating to potential upside to Azure growth forecasts and strong large deal activity. The commercial remaining performance obligation (RPO) metric provides visibility into future revenue. This will be the one to watch as a leading indicator.
Windows and Office Still Printing Cash
While Azure and AI grab the headlines, it’s important not to overlook Microsoft’s core cash cow businesses – Windows and Office. The shift to subscription-based licensing and the Microsoft 365 bundle have made these legacy franchises even more sticky and profitable.
In Q3, Office 365 Commercial revenue grew 15% as the company flexed its pricing power muscle with ARPU expansion. Also, Dynamics 365 cloud revenue accelerated to 23% growth.
On the consumer side, the PC market has stabilized from pandemic-driven highs but remains healthy, which bodes well for Windows OEM revenue. The Microsoft 365 Consumer subscriber base continues to grow steadily, now at over 80 million.
The Activision Blizzard acquisition, which closed in Q3, gives Microsoft a major content boost for its Xbox gaming platform. While console hardware sales may be pressured, I expect strong growth in Xbox content and services revenue to pick up the slack.
Valuation Leaves Little Room for Error
Trading at 36x forward earnings, Microsoft’s valuation is undoubtedly rich and well above its historical average. However, I believe this premium multiple is warranted given the company’s pristine balance sheet, exceptional margins and exposure to secular growth markets like cloud and AI.
Nevertheless, execution will be critical going forward to support the lofty share price. Any signs of deceleration in Azure or a more cautious tone from management about enterprise IT spending could spook investors.
No one can really say if this AI hype cycle is sustainable in the long run. Bears have a really good argument. But as I said before, AI and Azure aren’t the end-all, be-all for Microsoft.
The Verdict
When it comes to big tech stocks, Microsoft checks all the boxes for me.
- A wide-moat franchise.
- Exceptional profitability.
- An unmatched product portfolio.
- Viciously competitive in the most important growth markets in tech. For instance, Bing’s AI may not have grabbed market share, but it definitely caused Google (NASDAQ:GOOG, NASDAQ:GOOGL) to panic and make mistakes.
Plus, no other company can match Microsoft’s unique combination of Azure, Windows, Office software and all the possibilities with AI.
I don’t believe Microsoft is anywhere close to being “done” growing. It has over $80 billion in cash and a relentless focus on innovation. Clearly, this is one big tech giant still very much in its prime.
Heading into earnings, Microsoft remains one of my highest-conviction long-term buys. A strong buy rating is definitely warranted for the long run. It could go down more in the short term, but I’d be very surprised if MSFT didn’t outperform the broader market five years from now.
On the date of publication, Omor Ibne Ehsan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.