Why Microsoft 'sublimated'

Microsoft's impressive financial report last week cemented its position as one of the biggest winners in the AI ​​era.

However, Microsoft investors can take comfort from the strong but less-noticed growth of other business segments.

Beyond the AI ​​race, the Windows developer is still generating huge profits from enterprise customers spending on traditional technology – an area that has long been the company's strength.

Core revenue from Azure and software grows strongly

Many companies are moving from buying their own IT equipment to renting it from Microsoft through cloud services. They are also renting more standard computing services – such as hard drives for data storage – to support their AI efforts.

A large part of the recent strong growth in Microsoft’s Azure cloud business has come from “non-AI” services. Specifically, more than half of Azure’s 33% revenue in Q1 came from non-AI services. While it didn’t break out the equivalent figure for the 39% growth in Q2, the company said its “core infrastructure business” – Microsoft’s term for its non-AI cloud – was the main driver.

CEO Satya Nadella has brought Microsoft into the $4 trillion market capitalization club with Nvidia. Photo: EPA

This isn’t the only non-AI area where Microsoft is growing. Its Microsoft 365 commercial cloud business, which includes remote-access versions of Word, Excel, and other office software for businesses, grew 16% year over year in Q2, faster than the previous period. Consumer office software revenue also grew 20%, its best performance in years.

Financial advantages and symbiosis between AI and other fields

On the one hand, investors may want AI businesses to drive growth. After all, that’s what has driven up company valuations. However, tech stocks are arguably too reliant on AI, so the ability to grow other revenue streams would put companies on more solid financial footing.

Microsoft’s non-AI businesses also benefit from the symbiotic relationship with its AI efforts. CEO Satya Nadella said the company’s Copilot AI assistants for software products like Word and Excel attracted a record number of new users in Q2. It’s likely that many of those users will stick around and use Microsoft’s non-AI software, even if Copilot doesn’t stand out.

There’s another positive for Microsoft: non-AI sales can be significantly more profitable than AI. According to estimates from Bernstein Research analyst Mark Moerdler, non-AI gross margins in Azure were around 73% in Microsoft’s March quarter. That’s much higher than AI gross margins, which are only 30% to 40%, due to the huge costs of setting up AI infrastructure.

Demand for profitable non-AI services remains strong. Overall IT spending metrics were muted at the start of the year as companies weighed the impact of President Donald Trump’s tariffs and concerns about the health of the global economy , but sentiment appeared to have improved somewhat in Q2.

Competition in the cloud market and long-term prospects

A UBS survey of cloud computing customers in July showed a “clear improvement in attitudes” about spending. Most are continuing efforts to move workloads to the cloud, a reversal from the April survey.

In the long term, there’s no doubt that cloud computing will continue to be a strength for Microsoft. Its competitors – primarily Amazon.com and Google – are also growing rapidly, but they don’t have the breadth of enterprise software offerings that Microsoft has to cement its cloud position, even without AI.

Amazon said its cloud business grew just 17.5% in Q2, a result that disappointed investors and forced CEO Andy Jassy to explain Azure’s outperformance, saying recent quarterly swings in Azure’s favor were “just momentary.”

The question for Microsoft investors, then, is less about the company’s prospects and more about its valuation. The company’s stock has risen nearly 40% since the start of April, pushing its forward price-to-earnings (P/E) ratio above 33. That’s slightly higher than Amazon and well ahead of Google parent Alphabet, which trades at about 18 times forward earnings.

Investors may find this valuation easier to swallow, however, because while Microsoft's AI growth is real, it's not the only good thing going on at the software giant.

(According to WSJ)

Microsoft joins Nvidia in $4 trillion market cap club Shares surged after earnings report, pushing Microsoft's market cap past historic high, surpassing Apple and joining Nvidia, the world's largest semiconductor company.

Source: https://vietnamnet.vn/ly-do-microsoft-thang-hoa-2429683.html