Here's the magnitude of AI's effect on Microsoft's bottom line and what it means for the stock

Published Wed, Jan 31 20241:15 PM ESTUpdated Wed, Jan 31 20241:45 PM EST

Microsoft seemed to pass Wall Street's latest test when it demonstrated its ability to monetize artificial intelligence. For months, technology behemoths have talked up AI plans and flashy chatbots that grabbed investor attention and shot up share prices of mega-cap tech names and anything loosely connected to the phenomenon. Now, investors searching for signs that AI can materially boost the bottom line may be getting some early signs of success from the software titan's latest results. MSFT 1D mountain Microsoft shares fall after earnings Shares fell about 1.5%. The action came a day after Microsoft issued light guidance but delivered a top-and-bottom line beat and strong AI-focused commentary. Revenue from Azure and other cloud services grew 28% year over year on a constant currency basis, or 30% on a GAAP basis. Six points of that growth stemmed from AI. "We can see that AI is really starting to impact numbers positively for MSFT," said Barclays' Raimo Lenschow, noting that a six-point growth benefit to Azure is double compared to the first fiscal quarter. "With more benefits from Copilots still to come plus a potential recovery, MSFT remains an exciting story." The analyst reiterated his overweight rating, viewing Azure and Copilot as "promising growth vectors" in the "early innings" and boosting his price target to $475 a share. The update reflects about 16% upside from Tuesday's close. Commentary suggesting "more strategic" Azure deals and the addition of new AI customers over the past year also signal that the technology is fueling share gains, said Jefferies analyst Brent Thill, who boosted the firm's price objective to $465. Although Microsoft avoided offering sales figures and guidance on its Copilot offering bringing AI tools to its Office suite, management highlighted several use cases that reaffirmed Wall Street's confidence in its AI leadership. During an earnings call Tuesday, CEO Satya Nadella highlighted that the product is helping workers perform tasks 29% faster and experiencing a quicker adoption pace than its E3 or E5 enterprise suites. Microsoft has also transitioned from '"talking about AI to applying AI at scale," he added. "While it's early days for Microsoft 365 Copilot, we're excited by the adoption we've seen to date and continue to expect revenue to grow over time," said Chief Financial Officer Amy Hood. Morgan Stanley's Keith Weiss reiterated his bullish outlook on the tool, noting that while it may take time to ramp, field work signals "strong interest." "Bottom line, the yields on Microsoft's investments in Generative AI are becoming increasingly apparent, both in terms of direct monetization and driving further IT wallet share gains for the broader portfolio," he said. Wall Street analysts across the board regarded Microsoft's results as an affirmation of its AI leadership position. Piper Sandler's Brent Bracelin said in a Tuesday note that the results "reinforced Microsoft's first-mover advantage in AI applications." Meanwhile, Goldman Sachs analyst Kash Rangan called the company one of the "most compelling" opportunities across sectors, viewing AI as a major boon for an "already strong growth profile." "While some investors may have hoped for slightly more of a step-up in macro commentary or beat & raise cadence, in our view it is tough to argue with the clarity of vision, consistency of execution, early category leadership, GenAI traction, and cost discipline which result in a solid margin bump for FY24," said JPMorgan's Mark Murphy. — CNBC's Michael Bloom contributed reporting.