Analysts Are Bullish on Microsoft's Azure and AI Growth Ahead Of Q1 Earnings - Here's Why

Citi analyst Tyler Radke reiterated a Buy rating on Microsoft Corp MSFT.

MSFT remains the analyst's top mega-cap pick ahead of September quarter earnings. Radke sees the company accelerating total revenue and profitability, helped by stabilizing IT budget trends and new ramping GenAI revenue streams. 

Also Read: Morgan Stanley On Microsoft Ahead Of Q1: Optimistic on AI Future Despite Early Innovation Cycle

While the September quarter is a relatively lighter bookings quarter with a June FY-end, and his reseller survey saw a slight downtick in quota achievement, Radke said the setup post-September quarter gets more compelling with eyes on Azure growth potentially accelerating and the GA of Copilot, where his partner and customer conversations suggest strong early adoption trends. 

Radke updated his estimates for Activision and slightly raised Azure estimates on further signs of stabilization in cloud spending offset by some modest FX headwinds.

Radke projected Q1 revenue and EPS of $54.34 billion (consensus $54.41 billion) and $2.67 (consensus $2.65).

Evercore ISI analyst Kirk Materne reiterated an Outperform rating with a price target of $400.

Materne expects Microsoft to deliver solid Q1 results that help demonstrate some stabilization in the Azure business. 

He said that Y/Y growth of ~26% for Azure seems realistic, given the uptick in demand for AI services, including access to the enterprise API for OpenAI. 

While the Street is hoping for Azure growth to level off in 2Q (and potentially accelerate), Materne expects that the EMS business could remain a drag and, as a result, believes 2Q Azure guidance in the mid-20 %'s (~25%) should be viewed favorably and sets the stage for some reacceleration in CY24. 

Based on a more positive tone from channel partners, the analyst slightly bumped his 2Q Azure forecast to 24% from 23%. 

Outside of Azure, the analyst expects Q1 results that are primarily in line with guidance but remains upbeat about the setup into year-end and CY24 due to easier Windows comps, O365 copilot monetization, continued growth in demand for Azure AI services, the impact of Activision on gaming estimates, further share gains in security, and a continued balance between revenue and op-ex growth. 

The analyst said that Microsoft remains an attractive EPS/cash flow compounding story with significant upside optionality around AI, cloud, and gaming over the next few years. 

Price Action: MSFT shares traded higher by 0.66% at $332.39 on the last check Thursday.