Microsoft leans on its AI prowess to deliver a surprising quarterly earnings beat

Published Tue, Apr 25 20238:00 PM EDT

Microsoft 's (MSFT) better-than-feared fiscal third-quarter results, coupled with solid revenue guidance for its fiscal fourth, propelled shares roughly 9% higher in afterhours trading Wednesday — demonstrating the Club holding's resiliency in a softer economy. Revenue for the three months ended March 31 came in at $52.86 billion, beating analysts' forecasts of $51.02 billion, according to estimates from Refinitiv. Adjusted earnings-per-share (EPS) of $2.45 beat analysts' estimates by 22 cents a share, Refinitiv data showed. Bottom line Investor angst abounded heading into Microsoft's latest earnings results, given a broader slowdown in the cloud and a PC market challenged by excess inventory. While both challenges remain, Tuesday's results and outlook clearly show that the market was far too negative. Microsoft's post-earnings conference call Tuesday highlighted how the tech giant is leveraging its artificial intelligence (AI) prowess to play offense and take market share in areas it sees as major long-term opportunities, including the cloud and search. And given the current economic slowdown and continued uncertainty, Microsoft's showing in the quarter was certainly impressive. With the stock moving higher after hours off strong numbers, we're increasing our price target to $320 per share, from $300. Quarterly results Microsoft delivered a clean sweep of beats across its three main reporting segments. That includes its cloud unit, where revenues of $22.08 billion edged out estimates of $21.87 billion off the back of a 27% (31% constant currency) increase in revenues at cloud computing subdivision Azure. This is the single most important line item for the segment —and arguably the entire company — given Azure's large sway over investor sentiment around the stock. The 31% constant-currency growth rate falls within the low-30s percentage range management guided for three months ago. More importantly, Microsoft claimed Azure took market share in the quarter as customers flocked toward its AI-powered applications and infrastructure, which are being used by industry leaders like OpenAI and Nvidia (NVDA) to train large language models. Microsoft is a key investor in OpenAI. The personal computing division also beat analysts' forecasts and outperformed management's expectations across all businesses, though revenues were down a high single-digit percentage from last year. The quarter marked the fourth straight period in which Windows OEM revenue declined year-over-year, but PC demand came in a little better than expected. Gaming was mixed with total revenue down 4% (1% constant currency) due to a 30% decline in hardware revenue that was partially offset by a 3% increase in Xbox content and services. Search and news advertising revenue, excluding traffic acquisition costs, increased by 10% year-over-year (13% in constant currency), driven by higher search volumes and share gains for its Edge browser globally and Bing in the United States. It's only been two months since Microsoft launched new versions of Bing and Edge that incorporate OpenAI's ChatGPT — but early usage results seem very encouraging. Still, we're not seeing a material step change in revenue growth rates at this point, suggesting monetization is still in the infancy stages. In the productivity and business processes unit, revenue increased about 11% from last year, a result of 13% growth (17% constant currency) in Office commercial products and cloud services revenue, along with 14% growth (18% constant currency) in Office 365 commercial revenue. A lot has been made about how widespread corporate layoffs could negatively impact Office 365 seats, which essentially represent the number of business users given access to digital software. But the results have been far more resilient than what the headlines suggest, with commercial seat growth increasing by 11% from last year. Additionally, Microsoft 365 consumer subscribers increased to 65.4 million, up from 63.2 million in the December quarter. Note: Constant currency growth rates help strip out fluctuations in foreign currency, namely a strong U.S. dollar, to provide a clearer financial picture. Guidance Microsoft management on Tuesday provided the following guidance for the company's fiscal fourth quarter. In a positive surprise, Microsoft's fiscal fourth-quarter revenue guidance exceeded estimates, even at the low end, for the productivity and business processes and personal computing units. The latter comes despite a subdued view on PC demand, which management expects will be similar to the reported quarter because channel inventory is still elevated. Cloud revenue barely missed at the midpoint, but the consensus is well within management's range. More importantly, Azure revenue growth guidance of 26% to 27% in constant currency was above analysts' estimates of about 25.8%. Included in this growth range is an additional percentage point related to AI services. Collectively, the midpoint of Microsoft's guide was about $500 million higher than estimated. (Jim Cramer's Charitable Trust is long MSFT, NVDA. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Microsoft's new versions of Bing and Edge are available to try beginning Tuesday.

Jordan Novet | CNBC