Investors Focusing on Microsoft Stocks: Crucial Artificial Intelligence (AI) Metric Worth Monitoring in Upcoming Week
A fresh wave of corporate earnings reports has swept across America, with the next batch coming from Silicon Valley's elite tech giants, collectively representing about a third of the entire S&P 500's value. Wall Street is eagerly awaiting their updates, particularly on their advancements in artificial intelligence (AI), as it could potentially open new revenue streams for these giants.
Kicking off the series, tech titan Microsoft will reveal its earnings for the 2025 second quarter, which ended December 31st. Investors will be keeping a sharp eye on how Microsoft is leveraging its burgeoning portfolio of AI products and services. However, there's one crucial figure that could steal the spotlight next week.
Microsoft to shed lights on its AI ventures
Microsoft has Austrian AI powerhouse OpenAI in its corner, providing its technology to fuel Microsoft's AI ambitions. This affiliation has resulted in integrating OpenAI's models into various Microsoft services, including the Windows operating system, the Bing search engine, and the Edge browser, among others.
Subscribers to Microsoft's 365 productivity suite can also tap into ChatGPT-like services as an additional fee perk, allowing rapid content creation within platforms like Word, Excel, and PowerPoint. With more than 400 million 365 licenses worldwide, the potential user base for this premium service is massive. During the previous quarter, Microsoft announced that 70% of the Fortune 500 were already utilizing these AI tools, and daily users had more than doubled since three months prior.
Azure, Microsoft's cloud platform, has become a go-to destination for businesses looking to deploy AI, owing to its advanced data centers and third-party providers like OpenAI offering ready-made large language models (LLMs).
The number to watch closely
Azure consistently outpaces Microsoft's overall revenue growth, with its first-quarter revenue increasing a staggering 33% year-over-year – a rate twice Microsoft's overall growth. Azure AI played a crucial role in this surge in revenue, contributing 12 percentage points during the first quarter, up from just 5 percentage points in the previous year.
Investors will be keen to see if Microsoft can sustain this growth in AI services, as it represents a significant opportunity. Microsoft invested a substantial $20 billion in capital expenditures during the first quarter, primarily earmarked for AI infrastructure. The subsequent quarter saw Microsoft's capital expenditures surge to an extraordinary $55.7 billion, illustrating the company's commitment to building a robust AI infrastructure.
The growing significance of Microsoft's AI bets
Microsoft shares are trading at a premium 35.4 P/E ratio, surpassing its 10-year average by a margin of 7.5%. This high valuation is dependent on Microsoft demonstrating clear returns from its substantial AI investments each quarter. If Azure AI's contributions to Azure's growth begin to wane, investor sentiment towards Microsoft could swiftly change, potentially triggering a correction in its share prices.
Therefore, the single most critical figure to watch during Microsoft's earnings report next week will be the revenues generated by Azure AI. If it continues to grow at its current rate, it suggests enterprises are increasingly adopting AI and preparing to invest in LLMs. Conversely, any decline in Azure AI's contribution to Azure's total revenue could prompt investors to reassess Microsoft's valuation.
In light of Microsoft's significant investment in AI infrastructure and its growing reliance on Azure AI for revenue, investors are closely monitoring the money allocated for and the returns generated by these ventures. The performance of Azure AI will significantly impact Microsoft's financial standing, as its continued growth indicates strong demand for AI services and validates the company's investing strategy in the field.
%20Metric%20Worth%20Monitoring%20in%20Upcoming%20Week){kind=link}