Microsoft’s Trillion-Dollar Quarter Shows AI Trade Won’t Quit
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Author: Bloomberg Television · Watch on YouTube
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Original language: English
Original video: Microsoft’s Trillion-Dollar Quarter Shows AI Trade Won’t Quit · Channel: Bloomberg Television · 05:20 · Watch on YouTube
Topics: Enterprise AI applications, AI infrastructure and hardware, Markets and economy
Summary
Section titled “Summary”Microsoft’s strong late-July earnings report eased concerns about legacy software growth and the returns on its AI spending, helping its stock post its biggest quarterly gain since the late 1990s. The company remains optimistic that integrating Copilot into its software will expand the opportunity, while investors are looking for evidence of adoption and continued growth amid intense competition. Microsoft’s free cash flow remains positive despite sharply higher capital spending, distinguishing it from other major spenders. Whether investors accept continued high CapEx will depend on Microsoft showing that it delivers revenue growth, earnings growth, or improved efficiency.
Key points
Section titled “Key points”- Microsoft’s cloud growth and positive comments on legacy software helped address concerns raised earlier in the year.
- The stock rose more than 30% last quarter, its largest quarterly gain since the late 1990s.
- Microsoft is integrating a new version of Copilot into its legacy software businesses and sees room to expand there.
- Investors want stronger evidence of Copilot adoption and capabilities as competition from Meta, OpenAI, and Anthropic grows.
- Investors may expect Microsoft to keep proving its AI momentum quarter by quarter through the transition.
- Capital spending has risen sharply, prompting questions about its impact on free cash flow and when it will pay off.
- Microsoft is still expected to generate positive annual free cash flow, unlike the other major spenders discussed.
- Investor tolerance for further CapEx increases depends on evidence that spending is producing revenue growth, earnings growth, or improved efficiency.
Chapters
Section titled “Chapters”| Start | Chapter | Summary |
|---|---|---|
| 00:00 | Sentiment shifts after strong earnings | Microsoft’s late-July results helped ease worries about software growth and the returns on AI spending. |
| 01:01 | Legacy software and Copilot | The company sees opportunity in integrating Copilot into its software, while investors weigh its valuation and growth outlook. |
| 02:06 | Competition and proving AI momentum | Investors are watching Copilot adoption and Microsoft’s ability to maintain momentum in a competitive AI market. |
| 03:10 | CapEx, free cash flow, and returns | Microsoft’s free cash flow remains positive despite heavy investment, but investors want to know when the spending will pay off. |
| 04:47 | What investors need to see | Continued high spending may be accepted if Microsoft can show returns, but any weakness in that case could weigh on the stock. |
Quotes
Section titled “Quotes”They had the strongest cloud computing growth, and I think four years — 00:30
The growth outlook remains very strong and durable — 01:32
Microsoft is making a great case for its strategy. — 03:42
it really comes down to how much they’re able to make the case for itself. — 04:47
Concepts and entities
Section titled “Concepts and entities”Microsoft, Copilot, Meta, OpenAI, Anthropic, Alphabet, Amazon, CapEx, free cash flow, ROI
Full transcript (original language)
Section titled “Full transcript (original language)”00:00 There’s been a real change in sentiment towards Microsoft, the change in sentiment towards the better. Like you said earlier this year, Microsoft is really getting hit by these two major concerns. You mentioned the sort of overall software weakness that we were seeing earlier this year as people sort of debate. What are AI native offerings going to mean for the growth outlook of these legacy providers? And at the same time, there was a lot of concern about, you know, Microsoft’s aggressive spending on AI. When is that going to pay off? What does that doing to its cash flow?
00:30 So on and so forth. But in late July, they had a very strong earnings report that really helped to address both of these issues. They had the strongest cloud computing growth, and I think four years, which is really a reflection of the kind of I demand it seeing. And it gave some positive comments about it’s just legacy software businesses continuing to do well. So addressed both of those issues. And like you said, the stock rose more than 30% last quarter. That was its biggest quarterly gain since the late 90s.
01:01 And this is real money, folks. Um, this is not like a pink sheet of stock. This is a $3.8 trillion market cap that pays a of dividend, no less. Dividend. Ryan, what? What’s the message from the company about some of their legacy software businesses that may have some competitive threat from I. Mhm. Well, I mean the company remains very optimistic about these businesses. It’s really saying you know, it is um, it introduced a new version of its Copilot AI product. That is it is integrating into all of
01:32 these legacy software businesses. So it does see a big market there, and it sees a big opportunity to expand in those areas. And, you know, we are seeing investors really sort of gravitate into the stock. Like he said, it pays a dividend. The valuation is below its long term average. The growth outlook remains very strong and durable, with double digit growth in both earnings and, uh, revenue expected over the next few fiscal years. So the setup here looks pretty positive, whether you’re looking at it from a growth perspective, from a valuation perspective, or as an AI tailwind beneficiary kind of perspective.
02:06 Yet investors still want more because they want to see that kind of performance continue. What are some of the things that they’re watching for that they’re looking for Microsoft to execute on? Well, people are watching copilot. They want to see more adoption, more capabilities. Of course, is a very competitive area. We saw meta come out with news which garnered a ton of attention. OpenAI came out with its own AI agent product. Anthropic has its own services. All of these things are out there. There is so much competition that there is a real sort of back and forth about
02:37 who is in the leadership position right now, who is seeing momentum, who is at risk of losing market share. There’s so much volatility in there. So I think, you know, as investors I spoke to said like they are going to need to keep proving this pretty much every quarter until we kind of get through this transition period and we get a greater sense of what things are going to be like in a market where I has really proliferated. Ryan, how investors thinking about the CapEx story and the free cash flow story at Microsoft, because just in back to 2023, their CapEx was maybe $30 billion.
03:10 This year, it’s going to be forecast to be 190 billion next year, 217 billion. So what was a great free cash flow story ain’t so great anymore. How’s the market dealing with that and what’s the company saying? Well, one thing I would say is that while free cash flow has really been diminished because of all of this spending. Microsoft is still expected to have positive free cash flow on an annual basis. That makes it sort of distinct among the other major spenders. We did we did see, um, meta, alphabet, Amazon, all of them are free cash flow negative.
03:42 So this is certainly a point in Microsoft’s favor. Someone said it was the adult in the room because it’s spending, but not going into the red because of it. Uh, but, you know, certainly, uh, the most recent results we had, the strong cloud computing growth that helps to justify this level of spending. But I do think, you know, just the numbers, like you said, they’re so big. There’s so many questions about when are we really going to see this pay off. What is the longer term, uh, growth outlook related to all this spending? How much can it translate into revenue into earnings growth? What is the spending outlook? Are we still going to be seeing these kinds of huge CapEx numbers as you look
04:15 out several years? These are some big questions out there. But at least for the moment, people feel like Microsoft is making a great case for its strategy. Mhm. And I’m glad you point out the fact that it’s kind of on its own. Um, in terms of the hyperscalers, that is free cash flow positive compared to some of the other big names. Having said that, what is the sentiment like in terms of what it announces for CapEx when it does report earnings and about two weeks time. Three weeks time. I mean, do people want to see a continued increase in that CapEx, um, budget or are they going to react negatively to that?
04:47 That’s a great question. I do think it really comes down to how much they’re able to make the case for itself. As far as the ROI on all the spending, if they’re able to make a case that all of the spending is translating into, uh, revenue growth, into earnings growth and to improved efficiency, I think people will be, you know, okay with them continuing to spend at the pace they have been. But if you see any sort of crack in this narrative, any sort of hiccup, I do think people will, you know, look at this and say, what are they getting for all of this spending? And we could see the stock pullback on account of that, the same way we saw with, uh, Meta and Alphabet when they
05:20 reported last earnings season. But of course meta then comes out with news and they’re able to show like look we develop this product that’s doing well. Uh, there’s a lot of optimism about its ability to monetize it going forward. And we saw a sentiment shift again to the positive. So again, things are very fluid in this market. There’s so much competition. And people are really just sort of, um, you know, eager to make sort of trades just based on what is the latest, uh, you know, sign of momentum, the latest sign of growth and, you know, caution.