Shanghai, July 30 (Xinhua) -- Due to poor financial reports from Google and Tesla, market risk aversion has intensified, and technology stocks experienced a significant sell-off last week. Microsoft will release its Q2 2024 (April June) financial report after US stock market hours on Tuesday, July 30, continuing to test investors' "AI faith". The monetization capability of AI and capital expenditure will become the focus of attention.
At present, the market generally expects Microsoft's Q2 revenue to increase by 14.6% year-on-year to $64.37 billion, with Microsoft's cloud business (Azure public cloud services, Office 365, Dynamics 365, and LinkedIn) revenue becoming the focus of market attention, expected to reach $37 billion, a year-on-year increase of 22%.
Analysts generally believe that Microsoft's AI capital expenditures may put pressure on its profit margins in the short term. Capital expenditures for the second quarter are expected to be $13.273 billion, a 21.20% increase from the previous quarter and a 48.43% increase from the same period last year.
Focus on Azure and Office 365 revenue
Microsoft's three main revenue businesses include: Intelligent Cloud; Productivity and Business Processes; Business Processes）； More Personal Computing section.
According to Microsoft's last quarter financial report, the Smart Cloud business accounted for approximately 43.18% of total revenue, 31.64% of productivity and business processes, and 25.19% of personal computing.
In the Smart Cloud business, the revenue growth rate of Microsoft Azure may become its main driving force. Currently, the market expects Azure's revenue in the second quarter to increase by 8% compared to the previous quarter's revenue of $19 billion to $20.5 billion, accounting for 71% of the Smart Cloud business's revenue of $28.716 billion.
According to Synergy Research Group, Amazon Web Services (AWS) still leads with 31% market share, Azure's market share has increased to 25%, and Google Cloud ranks third with 11% market share.
Angelo Zino, Senior Equity Analyst at CFRA Research, believes that due to the high base of the same period last year, it is increasingly difficult for Microsoft Azure to maintain high revenue growth, but the prospects and importance of Microsoft's cloud computing in valuation are constantly increasing.
Zino explained that the revenue from cloud computing can help investors judge the future of AI monetization, and the application of AI in the cloud computing field can bring more direct and immediate revenue potential. Investors need to pay more attention to the application of AI in cloud computing and its short-term revenue contribution.
Affected by technological developments and investors' generally bullish sentiment towards the development of artificial intelligence and technology this year, the cloud computing service market is gradually expanding. Barclays stated in the report that Azure may have impressive performance, with a projected year-on-year revenue growth rate for the second quarter of 31%, which is expected to remain the same as the first quarter and exceed the consensus of 30.2%.
From the perspective of productivity and business processes, the growth in sales of productivity tools such as Office 365 will provide a significant boost to revenue. The market expects Office 365 to achieve revenue of $12.076 billion in the second quarter, with a year-on-year growth rate of 13.85%, which is slower than the 15% in the previous quarter.
Due to the subscription based nature of Office 365, the number of subscribers is an important indicator for measuring product performance. In recent years, the number of subscribed users for Office 365 has continued to grow. As of the first quarter of 2024, the number of subscribed users was 80.8 million, an increase of 3% compared to the previous quarter; Analysts expect the user base in the second quarter to reach 82.76 million, a month on month increase of 2.42%.
The construction of Copilot has provided a driving force for the sales growth of Office 365, but analysts generally believe that consumers are still in the trial stage of Copilot services for Office 365. It may take some time for subscription users to use Copilot on a large scale, and the computing and economic costs of operating this business are high. Therefore, it will take some time for the revenue of this business to achieve rapid growth.
The team led by Morgan Stanley analyst Keith Weiss stated in the report that Copilot is expected to make a more significant contribution to revenue in the fiscal year 2025. Microsoft's cloud business (including Azure and other cloud services, Office 365 commercial and other cloud businesses) saw a year-on-year revenue growth of 22% to approximately $37 billion, a slowdown from the previous quarter's 23%.
Rising costs and expenses may have an impact on Microsoft's profit margin
In the short term, Microsoft's AI capital expenditures may put pressure on its profit margins. Currently, the market expects Microsoft's total cost and expenses for the second quarter to be $36.955 billion, an increase of 7.81% compared to the previous quarter. Capital expenditures are expected to be $13.273 billion, an increase of 21.20% compared to the previous quarter and a growth rate of 48.43% compared to the same period last year.
Barclays expects Microsoft's capital expenditures to increase by 20% year-on-year in fiscal year 2025 and gradually slow down to below 15% in fiscal year 2026.
Currently, the market generally expects Microsoft's gross profit for the second quarter to be $44.753 billion, an increase of 3.22% compared to the previous quarter; The gross profit margin is expected to be 69.40%, a decrease of 0.7% from the previous quarter. It is expected that Microsoft's guidance for a 1% year-on-year decline in operating profit margin for the fiscal year 2025 will not change during the conference call after the financial report.
Morgan Stanley believes that Microsoft's capital expenditures may have a negative impact on gross profit margins, as Microsoft management warned in a post earnings call last quarter that gross profit margins would decline, with an expected 2% year-on-year decrease in gross profit margins for Microsoft Cloud in the second quarter.
Morgan Stanley stated that Microsoft's capital expenditures may increase significantly, from $32 billion in fiscal year 2023 to $63 billion in fiscal year 2025, sparking discussions in the market about when investments can generate returns.
Morgan Stanley believes that based on a gross profit margin range of 50% -70%, Microsoft's implied AI revenue from capital expenditures in fiscal year 2024 will be $5.8 billion - $9.6 billion, rising to $46.5 billion - $77.4 billion by fiscal year 2027. It is expected that Microsoft's AI capital return rate will reach 13.8% in fiscal year 2024, and may significantly jump to 35% by fiscal year 2025.
James Abate, Chief Investment Officer of Centre Asset Management, believes that as the market increasingly values the return on investment of tech giants, if there is a further downward trend in the returns obtained from large-scale AI spending, or if the monetization path is not as smooth as expected by the market, this will further affect the entire semiconductor chain and all AI related stocks.