Microsoft (MSFT) is scheduled to report results of the first quarter of its fiscal year 2024 after the market close on Tuesday, October 24, with a conference call scheduled for 5:30 pm ET. What to watch for:
CLOUD AND AI: In its fiscal fourth quarter, the company reported Microsoft Cloud quarterly revenue of $30.3B, up 21% year-over-year, or up 23% in constant currency. The company said: “Organizations are asking not only how – but how fast – they can apply this next generation of AI to address the biggest opportunities and challenges they face – safely and responsibly. We remain focused on leading the new AI platform shift, helping customers use the Microsoft Cloud to get the most value out of their digital spend, and driving operating leverage.”On the day after the company’s last report, Citi analyst Tyler Radke lowered the firm’s price target on Microsoft to $420 from $425, arguing that the Q4 results were “satisfactory, but lacked the spice investors may have been salivating for” following the pace of generative artificial intelligence and new product innovations at Microsoft. The firm acknowledges the modest upside to consensus numbers equated to a slight expectations miss, but says it still saw a number of positives in the quarter with further signs of Azure stabilization, ramping AI revenue contribution, and greater certainty on cost guardrails.On September 11, Citi opened a “90-day positive catalyst watch” on Microsoft while keeping a Buy rating on the shares with a $420 price target. Microsoft shares have lagged on a relative basis post the July quarter earnings report, but the analyst sees the stock “trading higher into year-end with a rich catalyst path ahead” with several artificial intelligence events. Citi believes dynamics may continue to emerge “as a potential third leg of the MSFT growth story” with accelerating growth driven by consolidation and AI tailwinds.More recently, Citi raised the firm’s price target on Microsoft to $430 from $420 and kept a Buy rating on the shares. Ahead of the September quarter earnings report, Microsoft remains the analyst’s top mega-cap pick. It sees the company accelerating total revenue and profitability helped by stabilizing IT budget trends and new ramping generative artificial intelligence revenue streams. Citi’s reseller survey saw a slight downtick in quota achievement, but the set-up post the September quarter “gets more compelling with eyes” on Azure growth potentially accelerating, the analyst contends.Meanwhile, Piper Sandler is flagging Microsoft as the firm’s highest conviction large-cap stock to own into year-end based on first-mover advantage in generative AI, accelerating growth prospects for the December quarter on a non-cloud recovery, the M365 Copilot general availability release catalyst on November 1, the Microsoft Ignite user conference catalyst on November 15-17, and multiple upside levers to revenue and EPS growth it sees over the next three to five years. Piper also noted microsoft.com subdomain visits increases its confidence in Copilot adoption. In the firm’s view, this hints at an inflection of IT administrators preparing for M365 Copilot. Piper reiterates an Overweight rating on the shares with a price target of $400.
“TRANSFORMATIONAL” ACTIVISION DEAL: On October 13, Activision Blizzard (ATVI) stated that the company completed the previously announced transaction with Microsoft, pursuant to the agreement and plan of merger, dated as of January 18, 2022, as amended, supplemented or otherwise modified from time to time. Pursuant to the merger agreement, each of the company’s issued and outstanding shares of common stock was canceled and automatically converted into the right to receive $95.00 in cash, without interest.Prior to that closing announcement, the CMA declared that the new deal for Microsoft to buy Activision without cloud gaming rights has been cleared after the CMA concluded it would preserve competitive prices and better services. In August this year Microsoft made a concession that would see Ubisoft (UBSFY), instead of Microsoft, buy Activision’s cloud gaming rights. The CMA said: “The new deal will stop Microsoft from locking up competition in cloud gaming as this market takes off, preserving competitive prices and services for UK cloud gaming customers. It will allow Ubisoft to offer Activision’s content under any business model, including through multigame subscription services. It will also help to ensure that cloud gaming providers will be able to use non-Windows operating systems for Activision content, reducing costs and increasing efficiency.”Following the news, DA Davidson kept a Buy rating and $415 price target on Microsoft, calling the deal “transformational” as it could kickstart a period of meaningful growth in gaming. The firm also believes that the acquisition is being underappreciated by the market despite how much publicity it has received over the past 20 months. The firm further contends that Microsoft’s approach in gaming is highly differentiated, and by combining with Activision, the Xbox is building a “titan in gaming”, calling the entity a “disruptive subscription service” in Game Pass with high quality IP playable anywhere.Meanwhile, FTC spokeswoman Victoria Graham was quoted by Reuters as having said: “Microsoft and Activision’s new agreement with Ubisoft presents a whole new facet to the merger that will affect American consumers, which the FTC will assess as part of its ongoing administrative proceeding. The FTC continues to believe this deal is a threat to competition.”
EXPECTATIONS: Current consensus EPS and revenue forecasts for Microsoft’s September-end quarter stand at $2.66 and $54.54B, respectively, according to Bloomberg data.More By This Author:Webuy Shares Soar In Market Debut
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