For Microsoft (MSFT) , blue is the new green.
And we’re not talking about just any old shade of blue, mind you.
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The software giant is going all in on Azure, which in addition to being the color of the sky also happens to be the name of the company’s cloud-services platform.
Microsoft touted Azure’s success within the tech titan’s fiscal-third-quarter earnings report, which blew past Wall Street earnings estimates of revenue and profit, largely thanks to rising adoption of artificial intelligence.
Azure revenue rose 33% year over year in the quarter. AI contributed 16 percentage points to Azure’s growth, up from 13 points in the previous quarter.
Related: Analysts reset Microsoft stock target amid post-earnings rally
“Cloud and AI are the essential inputs for every business to expand output, reduce costs and accelerate growth,” Chief Executive Satya Nadella told analysts during the earnings call.Â
“When it comes to cloud migrations, we saw accelerating demand with customers in every industry from Abercrombie & Fitch to Coca-Cola and ServiceNow, expanding their footprints on Azure,” he said.
Microsoft CEO Satya Nadella says customers in every industry are expanding their footprints on Azure. (Photo by Stephen Brashear/Getty Images)
Stephen Brashear/Getty Images
Fund manager cites Microsoft cloud and AI strength
Looking ahead, MSFT expects continued growth in cloud and AI services, with Azure growth projected at 34% to 35% despite potential “AI capacity constraints beyond June,” according to Amy Hood, Microsoft’s chief financial officer.
“We can tie the upside surprise in the March quarter as well as the sequential improvement for the current one back to Microsoft’s Azure and other cloud services business,” said Chris Versace, lead portfolio manager for TheStreet Pro Portfolio.
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“When we stand back and look at Microsoft’s March quarter and its guidance, the message to walk away with is the strength in AI and cloud that permeates across multiple business lines,” Versace said in his TheStreet Pro column. The AI and cloud businesses are “still somewhat capacity-constrained [but are] strong enough to more than offset the near-term uncertainty in the company’s hardware business.”
Versace said that 12 months from now, “we see [Microsoft] even better positioned as AI adoption across the enterprise continues.”
“Catalysts that will drive MSFT shares toward our $480 stock price include further confirmation that Azure is monetizing,” he said.
There’s a lot of monetizing going on in the cloud business.
Cloud-computing revenue is expected to reach $2 trillion by the end of the decade, according to a report by Goldman Sachs Research. Generative artificial intelligence is forecast to account for about 10% to 15% of the spending.
The total addressable market for cloud services is poised to expand at a 22% compounded annual rate from 2024 to 2030, Goldman said.
Generative AI could constitute $200 billion to $300 billion of cloud spending, as investment moves beyond megatech companies and foundation model providers.
Researcher: Microsoft to benefit from AI demandÂ
First-quarter enterprise spending on cloud infrastructure services increased to $94 billion worldwide, according to Synergy Research Group, up $17.5 billion, or 23%, from first-quarter 2024.
The market has grown 52% since the end of 2022, with Amazon (AMZN)  maintaining a strong lead in the market, though Microsoft and Alphabet’s Google (GOOGL)  once again had higher percentage growth numbers, the group said.
“We continue to see strong revenue and growth numbers coming out of the cloud market, with a major acceleration of growth over the last six quarters,” Synergy’s chief analyst, John Dinsdale, said in a May 1 statement. “All of the leading cloud providers are posting some impressive numbers.”
While Microsoft’s cloud results surged, Amazon’s cloud business grew at a slower-than-expected pace in Q1, a third straight revenue miss. Amazon Web Services, which accounted for about 19% of the parent’s total revenue, is the world’s top provider of cloud infrastructure.
Related: Analysts revise Amazon stock price target after earnings
Google’s first-quarter cloud revenue also came in below forecasts.
Microsoft’s shares are up 4% since January and up nearly 8% from a year ago.
Phillip Securities downgraded Microsoft to accumulate from buy with the price target affirmed at $480, according to The Fly, citing the recent price performance for the downgrade.
The investment firm sees Microsoft as well positioned to benefit from the rising demand for large AI models, boosting Azure’s appeal and driving revenue.
Further, Microsoft remains less affected by the Trump administration’s tariffs, as its growth is driven by cloud-based offerings and supported by a broad base of enterprise customers.
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