Microsoft’s Q1 Earnings Show Impact Of Companies Going All-In On AI

Key takeaways

• Microsoft smashed earnings forecasts with 7% sales lift and 9% net income increase
• The computing titan mentioned AI no less than 50 times on the call as it continues to invest in the cutting-edge technology
• Shares in Microsoft were up 9% at the report, and boosted competitors at the same time

After going so public with its bet on AI, Microsoft is now reaping the rewards. Its Q1 earnings report was released, unveiling a bumper crop of figures for the Big Tech behemoth. Revenue, net income and cloud computing were all up, delighting Wall Street and confirming Microsoft’s gamble has so far paid off.

But the good news was tinged slightly by the blow Microsoft received over its $69 billion proposed takeover of Activision Blizzard, which was blocked by UK regulators this week. We’ve got the lowdown on the earnings report and how AI is helping Big Tech companies weather the financial storm.

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What were Microsoft’s earnings like?

It was a firecracker quarter for Microsoft after a sluggish winter period. Microsoft’s net income rose to $18.3 billion, up 9% from the year before, while its sales hit $52.9 billion, up 7% over this time last year and above the $51 billion prediction from Wall Street analysts.

Azure, Microsoft’s cloud computing unit, swelled its revenue by 31%, while Intelligent Cloud’s revenue climbed 16% for the quarter. Its personal computing figure was down 9% to $13.3 billion, but that number is still far ahead of its $11.9 billion to $12.3 billion guidance range.

AI was mentioned no less than 50 times on the earnings call by Microsoft bigwigs, including CEO Satya Nadella. Microsoft’s CFO, Amy Hood, doubled down on the cutting-edge tech bet. “We will continue to invest in our cloud infrastructure, particularly AI-related spend, as we scale to the growing demand driven by customer transformation,” she said during the earnings call.

Overall, the picture was very positive for the struggling tech sector and the clear focus was on Microsoft driving long-term revenue growth through artificial intelligence.

Wall Street’s reaction

Microsoft shares were up 4% in pre-market trading at the report and have now spiked 7.24%. Microsoft’s stock price is up 23% since this year.

Because Azure did so well – its revenue increase far surpassed expectations – its competitors have benefited too. Amazon, which has its AWS division, was up 2.35%, while Google saw a small boost.

Some investors have upgraded their outlook for Microsoft, citing the strong cloud computing performance and the early ground Microsoft has made in AI. Bank of America, Wedbush and JPMorgan all boosted their price targets.

Big Tech’s bet on AI

AI has been a boon for Big Tech in an otherwise difficult financial environment. Google also shared its earnings report this week and while the effect wasn’t as upbeat on the stock price, it still showed positive growth for Big Tech and emphasized its AI work as the future.

Q1 earnings per share were $1.17, up from $1.08 predicted, and revenue was ahead of expectations at $69.79 billion. Its cloud division also grew by 28% to $7.41 billion.

AI repeatedly came up during the earnings call, with CEO Sundar Pichai waxing lyrical about the tech giant’s innovations in the field. Alphabet stock rose 3% at the news and is up 16% this year, but shed some of its gains after warnings on spending to increase data center infrastructure for AI computing power.

It’s not the only one to see an AI boost: chip maker Nvidia’s string of AI announcements and partnerships has seen a huge 88% boost to the stock price in 2023. During Meta’s earnings call, CEO Mark Zuckerberg touted Meta’s opportunity to “introduce AI agents to billions of people in ways that will be useful and meaningful”. Meta’s stock soared 11% at its earnings, helped by its ‘year of efficiency’ drive.

So, Microsoft wasn’t the only one to benefit from investing in AI and by extension, cloud computing. But with Microsoft’s partnership with OpenAI, whose ChatGPT products are proving to be the most sophisticated models on the market, Microsoft stands to benefit significantly from the AI upside.

Ups and downs for Microsoft this week

It was a swings and roundabouts kind of week for Microsoft, who also saw UK regulators deny its $69 billion purchase of Activision Blizzard. The UK’s Competition and Markets Authority (CMA) said it had blocked the deal “over concerns the deal would alter the future of the fast-growing cloud gaming market, leading to reduced innovation and less choice for U.K. gamers over the years to come”.

The deal is now up in the air for the two companies, with the acquisition having been in the works since January 2022. Analysts aren’t optimistic about the appeals process working out in Microsoft’s favor, either.

Activision Blizzard, which owns the likes of Call of Duty and Candy Crush, had a good quarterly earnings report, but the stock has still dropped 11.45% at the news. Microsoft had previously agreed to pay $95 a share for the gaming company.

The bottom line

Microsoft has so far played its AI hand nicely with its high-profile OpenAI partnership and perceived leaving other Big Tech competitors, namely Google, scrambling to catch up. As AI increasingly infiltrates everyday life, all eyes will be on who can keep the momentum going – and the profits rolling in.

The earnings are also a silver lining against an otherwise dismal economic outlook. There’s no saying if or when a recession will hit, but Microsoft’s report kicked off Big Tech’s earnings season with a more upbeat outlook than anyone was expecting. Now all Microsoft needs to do is continue to deliver on its lofty AI goals to keep investors happy.

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