Microsoft's AI demand under scrutiny as investors seek payday

Microsoft is expected to report its slowest quarterly revenue growth in a year on Wednesday as investors watch for signs of demand for artificial intelligence amid concerns about the slow payoff from significant investments in the technology.

The software giant is widely viewed as a front-runner in the race to capitalize on generative AI, partly due to its investment in OpenAI, the owner of ChatGPT. However, recent reports indicate slow adoption for its key products, including the $30-per-month Copilot assistant for enterprises.

“There’s ‘a wall of worry’ around Microsoft’s earnings,” Morgan Stanley analysts said, pointing to “ramping capital expenditures, margin compression, lack of evidence on AI returns, and messiness post a financial resegmentation.”

The results will be the first since the company in August changed the way it reports its businesses to align more closely with how they are managed. However, the change has made it harder to estimate last quarter’s performance.

Microsoft’s stock has risen about 1% since its last earnings report in late July, significantly underperforming the benchmark S&P 500 (.SPX). Year-to-date, the stock is up approximately 14%.

Growth in Azure cloud business slows

Microsoft’s Azure cloud-computing unit likely grew 33% in the company’s fiscal first quarter ended Sept. 30, according to seven analysts polled by Visible Alpha. While that aligns with the company’s expectations, it is slightly lower than in the previous quarter.

Although AI’s contribution to Azure increased, accounting for 11 percentage points of growth in the fourth quarter, overall business growth has slowed. Microsoft said in July it expected Azure growth to accelerate in the second half of the fiscal year.

Analysts polled by LSEG estimate Microsoft’s total revenue rose 14.1% to $64.51 billion in the September quarter.

Like its competitors in AI, Microsoft has cautioned that spending on the technology will remain high. Capital expenditures in the September quarter are estimated to have risen 71.7% to $19.23 billion, according to Visible Alpha.

Microsoft, Apple and Nvidia shares rise in AI eraReuters

Copilot skepticism

Copilot has not gained traction as Microsoft initially projected. A survey of 152 information technology companies conducted by research firm Gartner in August found that the majority had not moved their Copilot initiatives beyond the pilot stage.

Some analysts believe Microsoft’s recent updates to Copilot, including a feature allowing autonomous AI agents to perform routine tasks without human intervention, could increase adoption.

“Most investors seem skeptical of 365 Copilot adoption since they aren’t personally using it much,” said Melius Research analyst Ben Reitzes. “However, it seems Copilot data points are getting modestly better,” he added, noting the assistant’s “increasingly improving customer list.”

Microsoft’s productivity and business processes unit, which includes Office products, LinkedIn, and 365 Copilot, is expected to report stable quarter-on-quarter growth of 12%, according to Bernstein’s Mark Moerdler, one of the top-rated analysts for Microsoft, according to LSEG.

Revenue in Microsoft’s intelligent cloud segment, which includes Azure, likely increased by 20%, maintaining the same growth rate as the previous quarter, Moerdler estimated. He added that the personal computing segment, which includes Windows and gaming, likely saw growth as the PC market stabilized.