Market Analysis

Microsoft's (NASDAQ: MSFT) latest financial update highlights Azure as the fastest-growing cloud service among hyperscalers, according to a Sunday note from Wells Fargo analysts.

In this update, Microsoft refined its reporting to exclude contributions from per-user services like Enterprise Mobility and Security (EMS) and PowerBI, allowing a clearer focus on Azure's core growth. The revised figures show that Azure's revenue grew by 33% year-over-year in constant currency (cc) for fiscal year 2024, an increase from the previously reported 30%.

The analysts noted that while this revision offers a more accurate reflection of Azure's performance by isolating it from slower-growing segments, it also comes at the cost of previous metrics for Office 365 Commercial.

As a result of these changes, the first-quarter guidance for fiscal 2025 has been updated to reflect a 33% growth in constant currency, up from the earlier range of 28-29%.

The new Azure revenue metric now suggests an annualized run rate of about $62 billion as of June 2024, compared to an estimated $80 billion when per-user services were included.

The report also explores the broader implications of these disclosures, particularly concerning AI.

While Wells Fargo's estimates for Azure AI remain consistent, the new data reveals a greater contribution of AI to Azure's growth, now accounting for nearly 9% of Azure revenues in the fourth quarter of FY24, up from previous estimates of 7%.

Additionally, the revised metrics may impact the margin profile of Microsoft's Intelligent Cloud segment, as excluding high-margin services like EMS and PowerBI could lead to a slight decline in gross margins.

Nevertheless, Wells Fargo analysts reaffirmed their Overweight rating on Microsoft stock, with a price target of $515, citing the "durability" of the tech giant's business and "favorable long-term tailwinds."

Paraphrasing text from "Reuters" all rights reserved by the original author.