Demand for Microsoft AI is under investor scrutiny

The market expects Microsoft to report its slowest quarterly revenue growth of a year on Wednesday, as investors await signals from the company on demand for artificial intelligence products amid growing concerns about the slow return on major investments made in the technology.

Microsoft is widely considered a leader in the race to take advantage of generative artificial intelligence, thanks in part to its investment in OpenAI, the maker of ChatGPT. But recent analyst ratings point to slow adoption of its core products, including the Copilot assistant.

There is “a wall of concern” surrounding Microsoft’s earnings, Morgan Stanley analysts said, pointing to “increased investment, margin compression and lack of evidence on AI returns.”

The findings to be released Wednesday are the first since Microsoft in August overhauled the way it publishes company data to more closely align with how it is managed. This change, however, made it more difficult to estimate the company’s performance in the latest quarter.

Microsoft shares have risen only about 1% since it last reported results in late July, vastly underperforming the benchmark S&P 500 index. But year to date, the company’s shares are up about 14%.

Microsoft’s Azure cloud computing unit is expected to show 33% growth in the company’s fiscal first quarter ended Sept. 30, according to seven analysts surveyed by Visible Alpha. This is in line with the company’s expectations, but slightly lower than the previous quarter’s performance.

While AI’s contribution to the Azure drive increased – and accounted for 11 percentage points of growth in the fourth quarter – overall activity slowed. Microsoft said in July that it expects Azure growth to accelerate in the second half of the fiscal year.

According to analysts consulted by Lseg, the market expects Microsoft’s total revenues to increase 14.1% to $64.51 billion in the September quarter.

Analysts estimate that Microsoft is expected to see investments in the latest quarter rise 71.7%, to $19.23 billion, according to Visible Alpha.

SKEPTICISM ABOUT COPILOT

Copilot didn’t take off as Microsoft had predicted. A survey of 152 information technology companies showed that the vast majority of them had not advanced their Copilot initiatives beyond the pilot phase, research firm Gartner reported in August.

Some analysts believe, however, that Microsoft’s recent initiatives, including the ability to create autonomous AI agents – capable of performing routine tasks without human intervention – with the help of Copilot, could boost adoption of the assistant.

“Most investors appear skeptical about the adoption of 365 Copilot,” said Ben Reitzes, an analyst at Melius Research. “However, it appears that Copilot’s data is improving a bit,” he said, adding that the assistant “boasts an ever-improving customer list.”

Microsoft’s Productivity and Business Processes unit, which houses Office, LinkedIn and 365 Copilot products, is expected to see quarterly growth of 12%, according to LSEG.

Source: Terra

Rose

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