Microsoft – Cloud Benefits From Best-in-Class AI Position

Published on
  • Microsoft’s third quarter revenue rose 10% at constant currency, driving a 15% uplift in operating profit to $22.4bn – including a c.$700m increase in R&D spending
  • Growth was driven by Microsoft Cloud, as CEO Satya Nadella said Microsoft is the preferred platform for customers to gain exposure to next generation AI
  • $9.7bn was returned to shareholders in the period
  • The shares rose 4.8% in initial after-hours trading

Microsoft Rides The AI Wave

Microsoft Corp (NASDAQ:MSFT) has ridden the AI wave this quarter, with results and leadership comments cementing the notion that the software specialist is top of the pack when it comes to potential monetization of this phenomenal tech.

The sheer fact is, artificial intelligence can be integrated into the majority of Microsoft’s existing products, massively raising the revenue and margin ceilings in these areas. By doing this, the appeal of Microsoft’s products should increase, which will culminate in better pricing dynamics.

This doesn’t just apply to the GPT side of things, Microsoft’s own cloud security offerings stand to benefit as businesses seek to up their defenses against AI attacks.

AI offers huge economic advantages through higher revenues and crucially, better productivity for businesses. In a world where corporate margins are sluggish, this new tool offers attractive benefits.

According to some estimates, the AI market could reach $2.7trn over the next ten years, meaning there will be huge efforts for land-grabbing in the coming years. Starting at the front of this race has tangible benefits.

Regulatory risk is a hurdle. The lack of intricate understanding in regulatory bodies increases the risk of impractical or damaging regulation coming into force, which is something that will need to be monitored closely.

While AI could be a very lucrative cash cow, this dawning of a new internet age isn’t guaranteed to break smoothly. Changes of this magnitude can see derailments and jittery market moves. To that end, it’s encouraging to see advertising revenue looking brighter.

For now, cloud is picking up the slack being left by Windows OEM revenue, which is the price that PC manufacturers pay Microsoft to put Windows on their products, which fell by 28%, as well as continued weakness in Devices.

Article by Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown