Microsoft is ‘changing rules of the game on gen AI’ after Q1 earnings

Microsoft Corp (NASDAQ: MSFT) just reported strong results for its first financial quarter. Its shares are up 5.0% in after-hours trading.

Microsoft Azure drove strength in Q1

Investors are particularly cheering upsized growth in Azure.

Microsoft reported a 28% year-on-year growth (constant currency) in that cloud-computing platform versus 25.6% increase expected. Ted Mortonson – a Baird strategist told Yahoo Finance today:

Microsoft is leveraging that cloud revenue on multiple levels. Microsoft controls the enterprise. It’s almost a line item for some Fortune 500 companies’ IT budgets.

Azure OpenAI Service added 7,000 news customers in the recently concluded quarter. Artificial intelligence, as per CFO Amy Hood, resulted in about a 3 percentage points growth in Azure in Q1. She expects the cloud-computing platform to perform stably in the coming quarters.

Microsoft is helping organizations securely and responsibly develop and deploy AI strategies that meet their business needs. From Microsoft's Copilots to Azure OpenAI Service, @Visa, @IBM and more are embracing AI transformation. Read more: https://t.co/AxtIsc1Lm1

— Microsoft News and Stories (@MSFTnews) October 23, 2023

Microsoft’s guidance for the current quarter

Intelligent Cloud at large brought in $24.3 billion in revenue in the first quarter – up better-than-expected 19% annualised growth. Mortonson added:

This is the death star of tech. They’re operating on all cylinders. They’re swimming out of their traditional lanes. It’s a really impressive product set that will leverage Azure growth going forward.

Other notable figures in the earnings report include a 13% increase in Productivity and Business Processes revenue and a 3.0% increase in More Personal Computing – both comfortably ahead of Street estimates, as per the earnings press release.

Microsoft Corp is now calling for $60.4 billion to $61.4 billion in revenue for its current financial quarter – about a 15% growth that is about in line with analysts at $60.9 billion.

Microsoft’s Q1 financial highlights

• Earned $22.3 billion versus the year-ago $17.6 billion
• Per-share earnings also climbed from $2.35 to $2.99
• Overall revenue jumped 13% year-on-year to $56.5 billion
• Consensus was $2.65 a share on $54.5 billion revenue

Microsoft was successful in closing its $69 billion acquisition of Activision Blizzard last week as well.

Microsoft CEO says the Xbox is “really doubling down” on gaming both as a game producer and publisher after the Activision acquisition https://t.co/te8UoTEzvA pic.twitter.com/7OxCSdEEiR

— CharlieIntel (@charlieINTEL) October 24, 2023

Is it worth buying Microsoft stock?

On Tuesday, Jefferies analyst Brent Thill recommended that investors “stay long” on Microsoft as it’s delivering double digit growth even though the benefit of its AI investments haven’t even started to materially kick in.

The tech behemoth is slated to begin selling its Copilot AI tool from November 1^st. According to Baird’s Mortonson:

Microsoft is changing the rules of the game on Generative AI … they’re rolling out almost 11 Copilot offerings. That’s a major uplift for Microsoft from the enterprise perspective.