Microsoft sinks on 'investment surge' worries, Wall Street impressed by momentum
David Becker
Microsoft (NASDAQ:MSFT) shares fell 3.5% in pre-market trading on Wednesday as investors worried about aggressive spending in artificial intelligence, but Wall Street analysts said the company's momentum in AI is impressive.
Wedbush Securities analyst Dan Ives, who has an outperform rating on Microsoft (MSFT), said the increase in spending is not a surprise, as fiscal 2025 is the "true inflection year" for AI growth, with pricing, beta customers and use cases all getting rolled out in the next three to six months. 
"We believe MSFT is in the early innings of a massive penetration of AI and cloud that could conservatively approach 50% of its global installed base over the next 3 years," Ives, who boosted his price target to $400, wrote in an investor note.
On the company's earnings call, CEO Satya Nadella and CFO Amy Hood said the ramp in spending would be "gradual" in fiscal 2024, with Hood adding the impact would be weighted towards the second-half.
Ives also said Microsoft's (MSFT) fiscal first-quarter guidance was "solid" as Azure continues to remain resilient, even with PC weakness being a "drag."
Microsoft (MSFT) expects first-quarter sales to be within a range of $53.8B to $54.8B, with the mid-point below estimates. Of that, revenue attributed to the More Personal Computing segment, which houses Windows, will generate between $12.5B and $12.9B, well below analysts estimates. 
Bank of America analyst Brad Sills said the increase in spending for fiscal 2024 is "reasonable" in light of the opportunity ahead of the company.
"We view this investment as reasonable given the potential for contribution to both Azure and [Office 365] growth," Sills wrote in an investor note. "Guidance for effectively 100 [basis point] margin expansion (ex the lower deprecation tailwind) is impressive in a year where cost of sales is ramping and a testament to Microsoftâs massive operational/opex scale." 
Sills reiterated his buy rating and $405 price target and said the quarterly results and outlook are "validation that Microsoft is ahead of the curve in AI." 
Evercore ISI analyst Kirk Materne, who also rates Microsoft (MSFT) shares outperform, said that even with expectations "very high" going into the quarter, the company delivered across the board.
"We believe Microsoft did the right thing in terms of level setting expectations around near-term monetization of Copilot (i.e. itâs going to take time) though investors may have wanted more specifics on that opportunity," Materne wrote in an investor note, adding he would be buyers on weakness as fiscal 2024 is "compelling."
For the period ending June 30, Microsoft (MSFT) earned $2.69 on $56.2B in revenue. Included in that was $23.99B from its Intelligent Cloud division, which is comprised of its Azure cloud unit. Microsoft said Azure revenue grew 26% year-over-year, or 27% in constant currency.
A consensus of analysts expected Microsoft (MSFT) to earn $2.55 per share on $55.49B in revenue.
More on Microsoft's fourth-quarter earnings

Microsoft Corporation Q4 2023 Earnings Call Transcript
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Microsoft Q4 Earnings: AI's Role In Cementing Its Dominance