As the overwhelming popularity of ChatGPT brings its parent company OpenAI to the forefront, Microsoft, a significant shareholder in OpenAI, is once again returning to the limelight.
On July 25, Microsoft unveiled its fourth-quarter earnings report for the fiscal year 2023. Despite being touted as Microsoft's "most crucial financial report," it delivered only an average performance. The impact of AI on revenue was hardly visible, and growth in PC and cloud businesses continued to be sluggish, paling in comparison to the stellar performance of its staunch rival Google.
However, even before AI starts generating significant revenue, the capital market has already dramatically shifted its stance towards Microsoft. Bolstered by the success of ChatGPT, Microsoft's share price has repeatedly reached historical highs this year. From the start of the year to July 26, it has risen by 44.39%, reaching a market capitalization of $2.61 trillion, hot on the heels of Apple, the company with the world's highest market value.
This is just the beginning of wealth creation through AI. Global tech giants such as Microsoft, Google, Amazon, Meta, and Alibaba are all vying to invest in AI, a trend that seems irreversible.
Based on its advanced planning for AI, Microsoft could potentially become the next tech company, following Apple, to exceed a market value of $3 trillion.
A Lackluster Financial Report Microsoft's earnings report indicated a fourth-quarter revenue of $56.2 billion, a year-on-year increase of 8%. While it surpassed previous market expectations, it fell short of the double-digit growth witnessed in the same period last year. Net income was at $20.1 billion, growing by 20% year-on-year, which is still commendable.
Examining the specific business segments, Microsoft's Productivity and Business Processes department delivered a steady performance, achieving revenues of $18.29 billion, a year-on-year growth of 10%.
However, cloud service growth is slowing quarter-by-quarter. Microsoft's Intelligent Cloud revenue reached $23.99 billion, decreasing 8% quarter-over-quarter. The core Azure cloud service revenue also slowed its growth to 26%, whereas, a year earlier, Azure's revenue had experienced consecutive quarters of year-on-year growth exceeding 40%.
In addition, similar to other PC manufacturers, Microsoft's personal computer (PC) business continued to slump, with fourth-quarter revenue falling by 4% year-on-year to $13.9 billion. Revenues from the Windows operating system and hardware devices significantly declined, falling by 12% and 20%, respectively, year-on-year.
Therefore, overall, the impact of AI on Microsoft's revenue is not yet apparent, and revolutionary innovation has not yet brought about revolutionary revenue.
However, investments related to AI are still increasing significantly. Microsoft's capital expenditure in the fourth quarter rose by 30% year-on-year to reach a record $8.9 billion. Microsoft CFO Amy Hood indicated that this was due to the establishment of new data centers to support artificial intelligence.
Disappointingly, Microsoft's performance is predicted to continue to be weak in the short term.
Microsoft anticipates that by the first quarter of the 2024 fiscal year, Azure's business will continue to show sluggish growth, with a revenue growth rate of 25% to 26%.
On the whole, Amy Hood stated at the earnings conference that Microsoft's revenue forecast for the first quarter of the fiscal year 2024 is between $53.8 billion and $54.8 billion. This outlook falls short of external expectations and the performance of the most recent financial quarter.
As for when AI can start generating revenue, Hood stated that the AI tool Copilot is not yet fully prepared for release. Microsoft's AI service revenue will gradually increase with the expansion of Azure and the full release of Copilot, and it is expected to truly generate revenue in the second half of the fiscal year 2024.
The Power of Capital
In response to lower earnings expectations, Microsoft's stock price dropped approximately 4.15% after the earnings conference.
However, a trend has been established. Unquestionably, the surging wave of AI is reshaping various industries. Although the AI trend has slightly receded recently, everyone has been swept along with it, propelling progress forward.
This has stimulated limitless imagination from capital, first exemplified by NVIDIA and Microsoft. NVIDIA has surpassed old rivals Intel and AMD to become number one in the AI computational power field. Its share price has doubled this year, reaching $1.13 trillion.
Although it hasn't contributed significantly to earnings, Microsoft has already tasted the benefits brought by AI. Driven by the hot capital market, Microsoft's stock price has risen by 44.39% so far this year, hitting a historical high of $360 at one point.
As of July 26th, Microsoft's market value had reached $2.61 trillion, hot on the heels of Apple, the company with the highest market value globally-$3.05 trillion.
In this manner, with the endorsement of ChatGPT, Microsoft, one of the original tech giants, has once again risen to the top of the era and the capital market.
A Revolutionary Opportunity In fact, in recent years, major domestic and foreign companies like Microsoft, Google, Amazon, Meta, Apple, NVIDIA, Intel, AMD, Baidu, and others have invested heavily in data, algorithms, chips, and other AI domains, continuously pouring in funds and technology.
This trend heated up after ChatGPT's rapid rise to fame, with Tencent, Baidu, Alibaba, Meta, Huawei, and iFlytek entering the large-scale AI model race in the first half of the year, igniting a "thousand model battle."
In China, large industry models have become an entry point for AI commercialization.
Looking into the future, this AI arms race has just begun. Amy Hood has stated that Microsoft's capital expenditures will continue to grow quarter by quarter in the new fiscal year, primarily used for data centers, CPU chips, GPU chips, and networking equipment.
Google CFO Ruth Porat also stated that the company will significantly increase its capital expenditure in the second half of the year to support the Google Cloud business's rapid growth, including data center expansion and investment in office facilities.
In Porat's view, AI will have a far-reaching impact on the future of Google, including its core search advertising business, YouTube, Google Cloud, and other aspects. Google has invested heavily in AI research and development and has achieved breakthroughs in many AI technologies.
Microsoft, Google, and other tech giants' massive capital investments in AI demonstrate the consensus that AI will be the defining technology of the future.
The focus of these tech giants' future strategies will be AI, and their investments in this space are aimed at achieving a leading position in the AI era. Their strategies not only revolve around investment in data, algorithms, and chips but also extend to areas like quantum computing, 5G, IoT, and other cutting-edge technologies, as they aim to control the key technologies that underpin the digital economy.
In the context of this global AI competition, Microsoft's goal is to surpass other tech giants and achieve a leading position in the AI era.
"The AI era is a golden opportunity for tech companies," Microsoft CEO Satya Nadella said in a recent interview. "This is an important opportunity for us to show that Microsoft's role in the AI era will be far more significant than it was in the previous era."
At the same time, Chat GPT's success has also inspired Microsoft to pursue NLP technology more vigorously. In May of this year, Microsoft announced a $1 billion investment in OpenAI, the developer of Chat GPT, aiming to apply NLP technology to various business scenarios.
"Microsoft is transforming from a software company to an AI company," said Scott Guthrie, Microsoft's Executive Vice President of Cloud + AI Group, in an interview. "In the future, AI will be embedded in all our products and services. AI will become as ubiquitous as software is today."
In this sense, AI, like the internet, is transforming Microsoft. Just as the internet boom made Microsoft the world's leading software company, the AI boom is likely to transform Microsoft into the world's leading AI company.
AI Will Reshape Microsoft
With the rapid advancement of AI, the impact on Microsoft's business model is also evident.
Microsoft has always been a software company, but in the AI era, software and hardware are increasingly inseparable. This means that Microsoft's software-centered business model is increasingly challenged.
Therefore, Microsoft needs to adjust its strategy and focus more on hardware and AI, which will bring more changes to its products and services.
Microsoft has been investing in AI and has achieved significant progress. It has developed a series of AI products, including Azure Machine Learning, a cloud-based service for building and deploying machine learning models, and Azure Cognitive Services, a suite of AI services and cognitive APIs.
But AI also poses challenges to Microsoft. In the past, Microsoft could rely on its software expertise to maintain its competitive advantage. However, in the AI era, software and hardware are inseparable, and the competition is more fierce. Microsoft not only has to compete with traditional software companies but also with hardware manufacturers, cloud service providers, and other tech giants.
To meet these challenges, Microsoft needs to strengthen its capabilities in AI, hardware, and cloud services. It needs to develop more advanced AI technologies, build more powerful hardware, and provide more comprehensive cloud services.
At the same time, Microsoft needs to reshape its business model to adapt to the changes brought by AI. This includes transforming its business from selling software products to providing AI services, building AI ecosystems, and leveraging AI to create new business opportunities.
In conclusion, although AI has not yet brought significant revenue to Microsoft, it has already begun to reshape the company. The AI era presents both challenges and opportunities for Microsoft. How Microsoft responds to these challenges and grasps these opportunities will determine its future in the AI era.
The way forward for Microsoft, and indeed all tech giants, is undeniably paved with AI. With massive investments in AI research and development, the next decade will likely be defined by the advancement and implementation of AI across all sectors of technology and business.
Despite the underwhelming earnings report, Microsoft's investment in AI suggests a promising future. With its current focus and dedication, there's no doubt that AI will continue to be a significant part of Microsoft's growth in the coming years. The question remains as to how fast and how effectively Microsoft can capitalize on this opportunity.
