Microsoft’s inventory is below market averages. Through July 30, Microsoft’s inventory had increased 14%, lagging the S’s 14. 6% increase.
After a combined fiscal 2024 fourth-quarter earnings report, the company’s shares fell 3% in the run-up to trading on July 31. Should investors see this drop as a buying opportunity?I don’t think so.
In fact, Microsoft hasn’t provided a clear enough explanation for how the company will drive its earnings growth after investing tens of billions of dollars in generative AI.
While Microsoft stood out from its competition by providing tailored guidance on generative AI’s contribution to fourth-quarter growth, the company presented a sobering estimate of how many years it would be before this investment in generative AI pays off.
I have a lot of questions for Microsoft, including:
Microsoft looked at some of the issues with benefits. For example, the company attributed the slower-than-expected expansion of cloud installations to the limitations of its AI-related hardware and “weakness in some European territories,” according to Wall Street. Journal, and “said it expects Azure expansion to resume” in the December quarter.
Meanwhile, Microsoft expects spending on generative AI assets to “monetize in 15 years and beyond,” Microsoft Chief Financial Officer Amy Hood said, according to Reuters. I don’t know what Hood means by “monetized for 15 years. “
Above all, spending on generative AI can be minimized unless a wonderful app, like iTunes for the iPod, comes along for those beloved AI chatbots, I argue in my new book Brain Rush: How to Invest and Compete in the Real World of Generative AI. AI.
In reaction to a request for comment, a spokesperson representing Microsoft referred me to the transcript of the company’s earnings call.
Although Microsoft reported earnings and earnings consistent with a percentage above the Wall Street consensus, the company failed to achieve Azure cloud expansion for the quarter and expects lower-than-expected earnings expansion for the current quarter, Investor’s Business Daily noted.
Here are the key figures:
Microsoft highlighted the limitations to expansion resulting from a lack of capacity in cloud services. “As soon as we need capacity to sell, we sell it,” Brett Iversen, Microsoft’s head of investor relations, told the New York Times.
Just because a company invests in an interesting-sounding generation of generative AI doesn’t mean that many consumers will pay enough price for the product to generate the profit needed to cover the company’s initial capital outlay, Brain Rush notes.
To recoup the investment, the company’s product will have to solve a painful challenge for visitors better than competing offerings.
In the case of generative AI, Microsoft has two applicable groups of visitors: Azure companies to create generative AI chatbots and the workers and consumers that the chatbots aim to help.
Microsoft obviously shows the demand of the first user organization. AI contributed “8 points to Azure’s earnings expansion for the June quarter, compared to a 7-point contribution in the March quarter,” the Journal reported.
Microsoft also offers software, namely Word, PowerPoint, and Excel, with an AI co-pilot, for which the company charges $30 more per user each month.
Many companies are skeptical about the cost of paying for this service. The interviews I conducted for Brain Rush highlight the lack of enthusiasm on the part of companies. I doubt the company’s Copilot AI wizards for Microsoft 365 and its Bing search engine are wonderful apps. That is, to offer end users a much better solution for an unmet visitor need than existing products.
I’m not surprised Microsoft “didn’t break out Copilot’s revenue,” the Journal noted.
Meanwhile, Microsoft’s capital expenditure on generative AI is significant. “Microsoft’s overall capital expenditure on rentals was only about 23% of earnings for the fiscal year just ended, compared to an average of 14%,” the Journal reported.
For the fiscal year ending June 2024, Microsoft’s capital expenditures rose 75% to $55. 7 billion, IBD said.
Microsoft believes that market demand justifies this expense. The company has gained a “call signal,” making those investments essential, Chief Executive Officer Satya Nadella said at Tuesday’s investor convention. Microsoft expects to spend more on capital in fiscal 2025 than it did. in fiscal 2024, Hood told investors.
Analysts seem impatient with Microsoft. De fact, one of them gives the company a break. “There’s an AI halo effect that’s spreading to the rest of Microsoft’s businesses,” Rishi Jaluria, an analyst at RBC Capital Markets, told the Times.
This halo effect stems from Microsoft’s disclosure of some AI highlights and Jaluria’s belief that the company would have sold more Azure if it had more computing power, the Times noted.
Other analysts are running out of patience. Here are 3 examples:
Wall Street sees some upside in Microsoft stock. Based on analyst ratings, the stock could rise just 19% to reach the 12-month average value target of $507. 64, TipRanks notes.
If Microsoft knows how the company will recoup its investments in generative AI, it could give investors an explanation for why to be more bullish on its stock.
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