Microsoft Starts the Growth Curve of AI+ Productivity

Source: Tianfeng Securities, Kong Rong and Li Zeyu

Microsoft previously released its financial report for the fourth quarter of the 2023 fiscal year.

AI remains the highlight, guiding a doubling of Azure+AI revenue in the next quarter, but the revenue boost will be largely reflected in the second half of the 24 fiscal year.

Commercialization of Bing Chat

There were no major surprises in the advertising market this quarter, but attention is focused on the progress of Bing Chat's commercialization.

Advertising revenue slowed to 8% in the fourth quarter of this fiscal year. Although we believe that Bing traffic may have grown to some extent, the fourth quarter, when Bing Chat has not yet been commercialized, did not contribute to the increase in advertising revenue.

The theme of "generative AI challenging traditional search engines" in the noisy market has obviously not become a reality in the recent quarters. However, Bing Chat's high user activity and retention, after launching its advertising business, will be an important source that exceeds market expectations.

In the early stages of Bing Chat's commercialization, WhatsApp, WeChat, and others may be more appropriate points of comparison.

Opening scene, looking at space from downstream scenarios and computing power expenditure

Productivity and business processes:

Includes Office commercial products, LinkedIn, and Dynamics 365. This is Microsoft's most core business for consumers and commercial customers. Integrating Copilot into products such as Office 365 and Dynamics 365 improves the work efficiency of individual and enterprise users. We believe that this is not only an increase in ARPU multiplied by seats, but also a key factor in cultivating consumer mental cognition and the application ecology of enterprises. Microsoft has announced a pricing of $30 per month for 365 Copilot this quarter.

Intelligent cloud platform:

Includes Azure, Windows Server, SQL Server, Visual Studio, and other products and services that provide cloud computing services to customers. This is Microsoft's fastest-growing business. Increasing AI training and inference workloads based on Copilot enhances the consumption of Azure cloud services. We believe this is a good scenario for collaborative sales.

Personal computing:

Includes products and services targeting individual consumers, such as the Windows operating system, games, and devices. This is Microsoft's most mature business. Applying Copilot to improve relevance in Bing search engine and integrating it into the Edge browser creates a new search experience. In the long run, it is an opportunity to combine edge devices with personal assistants.

Investment recommendation

Considering the timeline for the release of Microsoft's AI products, we predict operating revenue of $251.7 billion, $299.7 billion, and $355.5 billion for the fiscal years 2024-2026, and net profit attributable to shareholders of $88.7 billion, $105.9 billion, and $138.0 billion for the same period.

We continue to have a positive outlook on Microsoft's technology stack and its long-term performance in the enterprise and consumer markets. We maintain a "buy" rating.