All eyes were on Microsoft (MSFT 0.52%) after the market close on Wednesday, as investors were looking for clues as to the state of artificial intelligence (AI) adoption. The company delivered robust results that beat on both the top and bottom lines, but investors were hoping for even more.
However, digging a little deeper reveals a hidden gem that investors shouldn't sleep on, as it provides insight into Microsoft's future prospects, and the news is decidedly good.
Image source: Getty Images.
The 10,000-foot view
For the company's fiscal 2024 fourth quarter (ended June 30), Microsoft generated revenue that grew 15% year over year to $64.7 billion. While growth decelerated slightly compared to Q3, seasonality came into play, so the growth slowdown wasn't surprising. Profits were equally robust, as diluted earnings per share (EPS) grew 10% to $2.95. For context, analysts' consensus estimates were calling for revenue of $64.4 billion and EPS of $2.93, so Microsoft surpassed both benchmarks with ease.
The company's cloud infrastructure service, Microsoft Azure, continued to deliver the goods, growing 29% year over year, boosting the intelligent cloud segment, which grew 19%. This was partially offset by more modest gains from the productivity and business processes and more personal computing segments, which climbed 11% and 14%, respectively.
The aforementioned growth deceleration was most noticeable in Microsoft's commercial bookings, which climbed 17%, down from 29% growth in Q3.
All eyes are on AI
The broad adoption of generative AI has been the driving factor behind the market rally since early last year, so investors were keenly interested in the impact of AI on the results. Indeed, AI came up 24 times during the conference call as details about the opportunity emerged.
CEO Satya Nadella noted that Microsoft now had over 60,000 Azure AI customers, up 60% year over year, while the "average spend per customer continues to grow." Furthermore, the number of Azure AI customers using the company's data and analytics tools grew at a brisk pace, up 50%.
Copilot -- the company's suite of AI-powered digital assistants -- has become the de facto face of Microsoft's generative AI efforts and made a strong showing as well, as users increased 60% quarter over quarter while existing users are expanding their deployments.
The number investors should be watching
To be clear, there are plenty of metrics that provide insight into Microsoft's performance and the trajectory of its AI aspirations. In my mind, none are more important than the impact of AI on the adoption of Microsoft Azure. Committing to a particular cloud infrastructure provider is a big decision. Many companies hedge their bets by spreading their cloud computing across a number of providers, helping to illustrate how critically important this can be to the success of a company's business.
Microsoft was quick to integrate AI across its products and services early last year, making a whole host of generative AI models and systems available to its cloud customers. This, in turn, has helped the company gain share against its cloud rivals.
CFO Amy Hood noted that "Azure growth included eight points from AI services, where demand remained higher than our available capacity." This marked the fifth consecutive quarter of accelerating contribution from AI.
This helped Microsoft outpace its so-called "Big Three" cloud infrastructure rivals. Azure revenue grew 31% year over year in the first calendar quarter, the fastest among the Big Three and marking the third consecutive quarter growing faster than the competition, according to data supplied by research firm Canalys. This suggests that Microsoft is gaining cloud market share at the expense of its rivals, thanks to the company's early wins in AI. If this persists, Microsoft could move up the ranks and eventually take the cloud infrastructure crown.
Finally, at 32 times forward earnings, Microsoft is selling for a slight premium compared to a multiple of 29 for the S&P 500. That said, the company's long track record of success and keen strategy in the AI revolutions suggests it's deserving of a premium. That makes Microsoft stock a buy.
