Microsoft will announce financial results for the second quarter of the 2024 fiscal year after the US stock market on January 30, EST. Analysts expect that demand for AI services combined with cloud computing will boost Microsoft's long-term growth trend. The market generally predicts that Microsoft achieved revenue of 61,054 billion US dollars in Q2, an increase of 15.75% year on year; earnings per share were 2.76 US dollars, up 25.56% year on year.

On the eve of the earnings report, Microsoft's stock price climbed to 404.87 US dollars on Thursday, with a total market capitalization of 3.01 trillion US dollars, becoming the second company after Apple to reach 3 trillion US dollars, and ushered in a new milestone.

Looking back at the previous quarter, Microsoft's performance completely exceeded expectations. FY24Q1 achieved revenue of $56.5 billion, a year-on-year increase of 13%. The revenue growth rate rebounded to double-digit growth for the first time in nearly a year; net profit of US$22.3 billion, an increase of 27% over the previous year.

Among them, the cloud business had the highest revenue, which achieved revenue of 24.3 billion US dollars, an increase of 19% over the previous year; the revenue growth rate of Azure cloud services was close to 30%, which greatly exceeded market expectations. Due to improvements in the profitability of the core business Azure, the operating margin of the intelligent cloud business was as high as 48%.

This outstanding performance reflects Microsoft's strong demand for cloud services. It also represents that the company's growth is recovering. On the day the results were announced, Microsoft rose more than 3%. In the AI wave led by ChatGPT, Microsoft, OpenAI's largest shareholder and partner, gained a first-mover advantage and achieved a 58% increase for the whole of last year.

Entering 2024, Microsoft is also launching an “AI artifact” - the Copilot Pro project for individual users. It marks the full entry of a series of “Microsoft Family Buckets” such as Word, Excel, and PowerPoint commonly used by migrant workers around the world, as well as the email software Outlook, into the AI era, and is also expected to drive further growth in its office software business.

What do the Wall Street giants think?

Overall, Wall Street analysts are generally optimistic about the profitability of Microsoft's AI office application after implementation, and they all raised the target price of the stock before the results.

Citigroup analysts on Wednesday reaffirmed Microsoft's buy rating and raised the price target from $432 to $470. The bank believes that Microsoft is in a leading position in the field of generative artificial intelligence and has multiple ways to monetize AI, which will drive significant revenue and profit growth that exceeds expectations. It is expected that Microsoft will also adjust its performance guidelines.

Morgan Stanley is also confident about Microsoft's future. The analyst survey found that 68% of people plan to adopt Microsoft's AI products sometime next year. Although this phenomenon cannot be reflected in the financial report for the second fiscal quarter, we may be able to see an increase in this portion of revenue before the end of the year. The bank raised its target share price from $415 to $450 and said they “remain confident of a higher-than-expected upside outlook.”

Bank of America said that the average sales price of Microsoft 365 Copilot has accelerated, driving a 20% increase in its office software. It is estimated that M365 Copilot's commercial office revenue will reach 389 million US dollars this year. The bank raised Microsoft's target price from $430 to $450, maintaining a “buy” rating, and growth is expected to accelerate this year.

How did the stock price perform on previous earnings days?

According to Market Chameleon, after backtesting the past 12 quarterly results days, Microsoft had a high probability of rising on the day of the results release, about 58%. The average change in stock price was ± 3.7%, the maximum decline was -7.7%, and the maximum increase was +7.2%.

Currently, Microsoft's implied change is ± 4.9%, indicating that the options market rose or fell 4.9% in a single day after betting on its performance; in comparison, Microsoft's average post-performance stock price change in the first four quarters was ± 4.8%, and fluctuations are expected to increase slightly this quarter. Judging from the bias in the volatility of options, it indicates that the current market is bullish on this stock.

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