What Wall Street is saying about Microsoft ahead of earnings

Microsoft (MSFT) is scheduled to report results of the first quarter of its fiscal year 2025 after the market close on Wednesday, October 30, with a conference call scheduled for 5:30 pm ET. What to watch for:

CLOUD: In its fiscal fourth quarter, the company reported earnings and revenue that beat consensus forecasts. Server products and cloud services revenue increased 21%, or 22% in constant currency, driven by Azure and other cloud services revenue growth of 29%, or 30% in constant currency, Microsoft noted.

Satya Nadella, chairman and CEO of Microsoft, said: “Our strong performance this fiscal year speaks both to our innovation and to the trust customers continue to place in Microsoft. As a platform company, we are focused on meeting the mission-critical needs of our customers across our at-scale platforms today, while also ensuring we lead the AI era.”

Amy Hood, CFO of Microsoft, highlighted “record bookings” and Microsoft Cloud quarterly revenue of $36.8B, which was up 21%, or 22% in constant currency, year-over-year.

On the day after the company’s last report, JPMorgan kept an Overweight rating on Microsoft, stating that the firm did not think investors were prepared to see Azure growth deceleration because of the perceived improvement in optimizations and cloud migrations, ramping of Copilots and Azure OpenAI Service, and the company’s elevated capital investments. The quarter presented less revenue upside than usual, and Azure landed at the lower-end of Microsoft’s guidance for Q4 as well as being guided below street consensus for Q1, the analyst told investors. The firm saw “some silver linings,” however, noting Microsoft called out record commitments to its Microsoft Cloud platform. JPMorgan believes Microsoft’s artificial intelligence momentum remains intact and its long-term trajectory is “unperturbed,” the firm added in its post-earnings note.

More recently, Citi lowered the firm’s price target on Microsoft to $497 from $500 and kept a Buy rating on the shares. The firm says Microsoft shares have lagged over the last quarter as “investors struggle to rationalize enormous ramps in capex, amidst underwhelming” Azure growth and slowing earnings growth. The firm sees a “mixed set-up” heading into the Q1 report. However, Citi’s reseller and CIO survey generally showed stability, and it believes Q2 can slightly surprise to the upside. The firm is a buyer of the pullback in shares as it expects investor sentiment to turn more positive post the quarter ahead of a second half reacceleration in Azure growth and earnings growth.

Meanwhile, Truist tells investors that the “numbers are set to catch up to the hype in the year ahead.” Based on the firm’s conversations with customers, partners, and resellers, and survey work with enterprise IT buyers, Truist believes Microsoft is set to outperform across key enterprise categories. The firm made no change to its Buy rating or $600 price target.

EXPECTATIONS ‘TOO HIGH’: On September 23, DA Davidson analyst Gil Luria downgraded Microsoft to Neutral from Buy with an unchanged price target at that time of $475. The firm believes competition has “largely caught up with Microsoft on the AI front,” which reduces the justification for a premium valuation, the analyst tells investors. Noting that Amazon’s (AMZN) AWS already is adding nearly as much cloud business as Azure after a period of a few quarters of Microsoft adding more business and that Google’s (GOOGL) GCP’s growth has also seen its business accelerate to comparable growth rates as Azure last quarter, the firm argues that Microsoft’s lead is now diminished in both the cloud business and code generation business, which it contends will make it hard for shares to continue to outperform.

On October 8, Oppenheimer downgraded Microsoft to Perform from Outperform and removed the firm’s prior price target. The firm believes consensus estimates for revenue and EPS are too high, calling OpenAI losses, which could be in the $2B-$3B range in FY25, its “primary concern.” Enterprises have been slow to adopt AI and associated revenues are likely to disappoint, the analyst tells investors. Given that Microsoft is investing in “once-in-a-generation” technology, the firm does not believe expanding margins will be a short-term priority, the analyst added.

Current consensus EPS and revenue forecasts for Microsoft’s September-end quarter stand at $3.10 and $64.51B, respectively, according to LSEG Data and Analytics.

Among analysts tracked by Bloomberg that have updated their views on Microsoft within the last twelve months, 64 have Buy or equivalent ratings, 5 have Hold or equivalent ratings and the average twelve month price target of 50 of those analysts is $500.16.

OPENAI: On October 2, OpenAI raised $6.6B in new funding at a $157B post-money valuation to “accelerate progress on our mission.” The company stated: “We are making progress on our mission to ensure that artificial general intelligence benefits all of humanity. Every week, over 250M people around the world use ChatGPT to enhance their work, creativity, and learning. Across industries, businesses are improving productivity and operations, and developers are leveraging our platform to create a new generation of applications. And we’re only getting started… The new funding will allow us to double down on our leadership in frontier AI research, increase compute capacity, and continue building tools that help people solve hard problems. We aim to make advanced intelligence a widely accessible resource.”

Investors in OpenAI include Microsoft, Thrive Capital, Khosla Ventures, Fidelity Management, Nvidia (NVDA), and SoftBank (SFTBY), the company noted at the time of its funding announcement.

On October 18, Berber Jin and Corrie Driebusch of The Wall Street Journal reported that OpenAI and Microsoft are facing off in a high-stakes negotiation as the startup behind ChatGPT is transitioning from nonprofit to a for-profit corporation after closing a funding round that valued it at $157B. Microsoft could end up owning a large stake in the start-up following a nearly $14B investment, but both Microsoft and OpenAI have hired investment banks to advise them on the process of translating its investment to equity in the for-profit company. Microsoft is working with Morgan Stanley (MS) and OpenAI with Goldman Sachs (GS), people familiar with the matter told the Journal.

The same day, Cade Metz, Mike Isaac, and Erin Griffith of The New York Times reported, citing people familiar with the matter, that the Microsoft and OpenAI partnership has “started to fray.” While Microsoft CEO Satya Nadella was initially willing to keep the cash investments flowing, he has begun to reconsider after OpenAI’s board of directors briefly ousted OpenAI CEO Sam Altman last year, the report claimed. Altman once called OpenAI’s partnership with Microsoft “the best bromance in tech,” but ties between the companies have begun to fray. Financial pressure on OpenAI, concern about its stability, and disagreements between employees of the two companies have strained the five-year partnership, people familiar with the matter were quoted as having said.

SENTIMENT: Check out recent Media Buzz Sentiment on Microsoft as measured by TipRanks.