Microsoft shares closed modestly higher Wednesday ahead of the software and cloud computing giant's third quarter earnings report, slated for after the closing bell on April 25.
Microsoft (MSFT) , which overtook Apple (AAPL) as the world's most-valuable company earlier this year, has extended its market leadership in the artificial-intelligence space with a host of infusions across its personal and business computing product suite as well as its flagship cloud computing division.
Cloud spending growth remains a key plank in Microsoft's AI ambitions, as it layers various offerings across its broader tech stack, tied in part to the rollout of its AI-support program called Copilot.
Microsoft said earlier this year that AI infusions added around 6 percentage points to the revenue growth of Azure, its flagship cloud product, over the three months ended in December. That was more than double the impact from the prior quarter.
Azure growth is estimated to have driven division revenue again in the three months ended in March, as it leveraged gains in both software-as-a-service sales as well as new infrastructure projects targeted to develop generative-AI technologies.
Intelligent-cloud revenue, including Azure, is expected to show an 18.8% rise from the year-earlier period to around $26.24 billion, a tally that would comprise around 43% of Microsoft's expected overall top line of $60.8 billion.
Microsoft expanding AI reach
Microsoft is also ramping up production of so-called small language models, AI datasets that perform simpler tasks, and cost significantly less, than the more common large language models.
"We see an acceleration of adoption for generative AI and Copilot activity, which in turn is catalyzing more Azure cloud deal flow for Nadella & Co., with major momentum heading into the next 6 to 12 months as AI-use cases explode across the enterprise landscape," said Wedbush analyst Dan Ives. He carries an outperform rating and $1,000 price target on the stock.
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However, the tech giant told European regulators last month that the AI-market leader — based on both its ability to self-provide specialized chips and its massive global dataset — is actually Google parent Alphabet (GOOG) .
Europe's powerful Competition Commission is probing both the broader competitive AI landscape as well as Microsoft's partnership with AI startup Mistral to determine whether the tech giant's stake amounts to "a decisive influence" over the Paris-based startup.
Britain's Competition and Markets Authority is also looking into Microsoft's acquiring of a seat on the OpenAI board, to determine whether it means de facto control of the group. MSFT assumed the board seat following OpenAI Chief Executive Sam Altman's chaotic exit and return last year.
A more immediate challenge for Microsoft, however, will be to demonstrate its ability to expand profit margins as it accelerates capital spending on its myriad AI projects.
Capital-spending ramp at Microsoft
Microsoft warned investors earlier this year that capital expenses would rise "materially' over the coming quarters, and approach $16 billion over the three months ended in March, as it develops the various AI-related additions to its vast product suite.
Analysts see Microsoft posting a bottom line of $2.82 a share, up 15% from the year-earlier period, with revenue rising a similar percentage to $60.8 billion.
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CFRA analyst Angelo Zino, meanwhile, sees earnings of around $2.84 per share, suggesting modest margin improvement, with an Azure revenue-growth rate of around 29%., with around 8 percentage points of that advance would come directly from AI services, the analyst estimated.
"Any insights on Microsoft 365 Copilot adoption will also be monitored (first full quarter), as we do expect to hear positive commentary and see positive contribution via higher [average revenue per user] within its Office Commercial business,' said Zino. He boosted his Microsoft price target by $20 to $475 a share, earlier this month.
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"Within Personal Computing, we expect growth of 14% as Activision continues to act as a positive tailwind on segment revenue," he added. "Despite elevated spend, operating efficiencies point to margin expansion through FY 26 as scale benefits are seen from cloud/AI investments."
Citigroup analyst Tyler Radke also likes Microsoft's broader AI positioning, as well as its Azure growth rates, but sees a stronger U.S. dollar blunting revenue gains going forward. He lowered his price target by $5 to $475 a share, earlier this month.
Microsoft shares closed at $409.06 each higher on April 24, after rising 0.37% the session to extend their year-to-date gain to around 10.5%. That pegs the group's overall market value at just over $3.04 trillion.
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