Source: Wise Finance.

$Microsoft (MSFT.US)$The latest release of the Q4 financial report and forecast for the next quarter has sparked a heated discussion on Wall Street about its AI-driven profitability. Some analysts are beginning to question whether this AI-driven profit model is sustainable or whether it is losing momentum.

Microsoft expects revenue for the first quarter of fiscal year 2025 to be between USD 63.8 billion and USD 64.8 billion, slightly lower than the expected USD 65.07 billion. Calculated at a fixed exchange rate, Azure is expected to grow 28% to 29% YoY, with intelligent cloud expected to be between USD 28.6 billion and USD 28.9 billion, growing 18% to 20%.

Bullish on Microsoft's AI prospects.

Wedbush Securities analyst Ives holds a more optimistic view and believes that this earnings conference call is a "validation" for investors. Ives maintains the "outperforming the market" rating and a target price of USD 550 on Microsoft.

Ives wrote in an investor report:"Last night, investors were focused on Microsoft's financial report. We believe that this conference call and the guidance for fiscal year 2025 are very positive, especially when CEO Nadella and CFO Amy Hood mentioned that commercial orders for the June quarter will increase and that Azure growth will 'accelerate in the second half of the year' on top of a 29% baseline growth rate."

"This is a validation conference call and guidance that showcases the story of Microsoft's cloud computing and the broader AI revolution happening in the tech world. Wall Street wants to hear these narratives... and Nadella and the team delivered the AI monetization commentary that the Street was hoping for."

However, he pointed out that the fourth quarter performance itself "was not bad", but "may disappoint those who are expecting more performance".

Bank of America analyst Sears is also optimistic about Microsoft, reaffirming his "buy" rating and target price of USD 510.

He pointed out that the accelerated development of Azure in the second half of the year "suggests that the weakness may not be sustained for too long." Sears wrote in an investor report:"Adoption of Microsoft-native AI services running on Azure, such as Azure AI services and Fabric data/analytics platform, is increasing. We expect platform leverage to offset capital expenditure/profit pressure. The prospect of a 100 basis point decline in profit margins in fiscal year 2025 remains unchanged, as the drag of growing AI combinations on gross margin is offset to some extent by the scale of other businesses (such as core Azure)."

"This illustrates the built-in platform capabilities in Microsoft's model, where the same AI that runs OpenAI LLM can be used in other AI-supporting services (such as GitHub Copilot, Microsoft 365 Copilot, and Azure AI Library)."

Sears raised his capital expenditure expectation for fiscal year 2025 from USD 53.8 billion to USD 58.3 billion, but he also noted that accelerated revenue growth and platform scale may occur.

He added:"We believe the fourth quarter is the quarter in which the stock achieves premium growth."

Bearish on Microsoft.

Not all analysts, however, have a positive view of Microsoft's quarterly performance and expectations.

Citigroup analyst Taylor Radke pointed out that Microsoft's performance "affects everyone." Radke reiterated his "buy" rating on Microsoft, but lowered his target price from USD 520 to USD 500.

Radke wrote in the report:"This quarter, revenue/earnings per share were slightly above expectations, but Azure business slowed down and first-quarter performance guidance was weak. Although the situation is generally good, leading AI/demand indicators remain objectively positive, with commercial orders growing 19% YoY and capital expenditure increasing (USD 19 billion, while expected to be USD 16 billion). Management said that with the capacity online, Azure will accelerate growth in the second half of the year."

"Lower-than-expected results and weak expectations imply a slightly negative trend in near-term expectations revision, which may put pressure on the stock price... But we believe that this weakness will be temporary, as leading indicators show that Azure growth will accelerate in the second half of the year, and the profit margin prospect (-100 basis points) looks relatively conservative."

Jackson Add, an analyst for KeyBanc Capital, also focused on the issue of slowing Azure growth and significantly increasing capital expenditure. However, he added that there is still some "room for maneuver" before the acceleration in the second half of the year, since Azure is still capacity-constrained in terms of AI.

Ad reiterated its 'shareholding' rating for Microsoft and a target price of $490, stating that capacity issues may bring some 'additional constraints' in terms of expenditure for Microsoft, as cash expenditures increase by $5 billion QoQ, a YoY increase of 75%.

Editor / jayden