BREAKINGVIEWS-Microsoft’s AI future is trickier to price today

By Robert Cyran

NEW YORK, April 30 (Reuters Breakingviews) - It’s time to find out precisely how juicy Microsoft’s MSFT.O artificial intelligence-infused future really is. The $3 trillion technology stalwart helped usher in a new era of investor hype as a partner to OpenAI, developer of breakthrough chatbot ChatGPT. Beneath talk of unleashing silicon consciousness is a straightforward hope: that an AI boom will drive higher sales of cloud services and more profit from smarter office software. Roaring 33% growth in Microsoft’s Azure unit satisfies the first item, but a recently diminished valuation premium for its stock implies fragile hopes for the second.

Quarterly results revealed on Wednesday show the company’s business of providing on-demand computing power and services expanding rapidly. Little wonder, given that it’s the bit-crunching muscle for the chatbot explosion. Growth in the crucial Azure cloud unit stepped up even from the prior quarter’s high bar. Moreover, Microsoft said that 16 percentage points of this uptick came from AI, compared to 13 points in the previous three months. This surprise performance helped expand the company’s overall topline by 13%, to $70 billion.

Building out this raw data-processing grunt is expensive, however. Microsoft plans to spend about $80 billion this year, counting capital leases, in a massive data-center expansion program. The company led by Satya Nadella is now spending three times as much per quarter as it was three years ago.

Sterling growth can help to allay any concerns about the requisite investment. The only wrinkle is in Microsoft’s office software business, where it’s still trying to convince users to pay more for AI-powered tools. While the commercial products unit increased revenue 11% year-over-year, that’s down from 15% last quarter, not quite a stratospheric takeoff.

Investor fervor for Microsoft’s vision of the future has waxed and waned over time. The company’s stock fell nearly 10% in the past six months, leaving it trading at 27 times expected earnings over the next year, according to LSEG data. After surging higher, that’s back to about where it was before ChatGPT was released. Moreover, the gap between Microsoft’s multiple and the broader S&P 500 Index .SPX has made a similar roundtrip.

Earlier this year, Nadella waved away worries that remarkable efficiencies in developing AI unveiled by China’s DeepSeek would slow growth. He might have been onto something, at least in the short-term. But successfully charging more for stuffing chatbot smarts into a word processor may prove a concrete test of whether consumers are actually willing to shell out more cash for improved software. There, it’s still not clear whether the juice lives up to the multi-billion-dollar squeeze.

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CONTEXT NEWS

On April 30, Microsoft reported revenue of $70.1 billion for the quarter ending on March 31, an increase of 13% from the same period a year ago.

The technology giant earned $25.8 billion, an increase of 18% year-over-year.

Revenue at Microsoft’s Azure cloud services unit increased 33%. The company said that artificial intelligence contributed 16 percentage points to Azure's growth, compared to 13 percentage points in the previous quarter.