Microsoft Posts Strong Earnings, AI Fuels Azure Growth
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Microsoft posted solid FY2Q24 results with 12% organic revenue growth and raised FY2024 operating margin guidance by 100-200 basis points. AI contributed 6 points to Azure's 28% constant currency growth.
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Non-AI Azure growth decelerated by 3 points to 22%, suggesting optimizations have ended but no major cloud inflection yet. AI uptake remains strong and contributed majority from inference workloads.
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Office 365 grew 16% in FY2Q24, in line with expectations. Early Copilot adoption encouraging but no evidence of ramp to boost growth yet.
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Capital expenditures fell short in FY2Q24 due to delayed delivery of a 3rd party capacity contract, but expected to increase materially in FY3Q24 to support AI and cloud demand.
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Valuation reasonable at 30x forward P/E. 1-year and 3-year price targets of $406 and $525 based on forward P/E of 30x. Intrinsic value estimate increased to $355.