Microsoft heads into Q4 earnings announcement with one big Risk Question: Is the company's AI ...
investors who will be attending the company's upcoming fourth quarter earnings call may have one 'big question' for the tech giant. They are expected to ask the company:
Is the company's AI 'upper hand' at risk as its partner OpenAI plans to go public while reportedly discussing partnership opportunities with rivals like Google, Oracle and CoreWeave for cloud services?
Due to its exclusive licensing deals and access to OpenAI's models, Microsoft has been a significant beneficiary of the generative AI boom. This partnership has reportedly fueled growth in Microsoft's Azure cloud business and pushed its market value toward $4 trillion. According to data shared by Visible Alpha (seen by the news agency Reuters), the tie-up is expected to have driven a 34.8% increase in Microsoft's cloud service Azure's revenue for the April-June quarter, which exceeds the 33% rise in the last quarter.
However, the partnership deal is currently being renegotiated as OpenAI aims for a public listing. As per recent reports, a potential deadlock over the extent of Microsoft's access to the technology of the ChatGPT maker and its stake is expected in the coming days, if OpenAI convert into a public-benefit company. This conversion requires Microsoft's approval and is crucial for a $40 billion funding round led by SoftBank Group, with $20 billion contingent on the restructuring being finalised by the end of 2025. Meanwhile, OpenAI has recently deepened its Oracle ties with a planned 4.5 gigawatts of data centre capacity and added Google Cloud as a supplier for computing capacity.
Why investors may still have confidence in the Microsoft OpenAI deal
According to a report by Reuters, UBS analysts have noted that investor opinions on the Microsoft–OpenAI deal are mixed. However, Microsoft maintains a stronger position in the partnership.
'Microsoft's leadership earned enough credibility … such that the company will end up negotiating terms that will be in the interest of its shareholders,'
the analysts said to Reuters.
Some of that confidence among investors appears to be reflected in Microsoft's stock performance, which has gained over 20% so far this year.
During the April–June period (fourth quarter of Microsoft's fiscal year), the company may have seen positive effects from a weaker dollar, steady demand for non-AI Azure services, and early Windows orders by PC makers anticipating potential US tariffs, Reuters noted.
Meanwhile, revenue is projected to have grown by 14% to $73.81 billion, marking its most significant increase in three quarters, according to LSEG data seen by Reuters.
The company's profit is also expected to have risen 14.2% to $25.16 billion, though this represents a slightly slower pace than the prior quarter due to higher operating expenses.
Apart from this, capital spending is also likely to draw attention in the earnings call after Alphabet recently announced $10 billion increase in its annual budget.
Microsoft has indicated it is still facing capacity limits in AI and suggested further capital expenditure growth after spending over $80 billion last fiscal year. However, the pace may be slower and focused on shorter-term assets like AI chips.
According to Dan Morgan of Synovus Trust, who holds Microsoft stock, the investment appears to be yielding results.
'Investors may still be underestimating the potential for Microsoft's AI business to drive durable consumption growth in the agentic AI era,'
Morgan said to Reuters.
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