MSFT, AMZN Earnings Preview: Cloud Growth in Focus for AI Demand

The two tech giants could be the highlight of the week as investors look past their marquee business to the expected future revenue generator: AI.

Microsoft on Cloud AI

For Microsoft's earnings on Thursday, the cloud division is expected to take priority over the smaller Windows operating system business. Cloud revenue has increased thanks to demand from businesses decentralising operations and needing more storage for AI projects. Microsoft also invests in AI developer OpenAI, allowing it to benefit from growth in that field. Machine learning will likely be the main interest of investors at the upcoming earnings event.

Analysts forecast Microsoft's third-quarter revenue to rise 15% year-over-year (YOY) to $60.6 billion, twice as large as the year-ago 7%. Earnings are projected at $2.81 per share, which is also expected to see a 15% increase. However, revenue growth may slow slightly from the second quarter, in line with the company's guidance. For the outlook, investors will likely watch for updates on AI integration and continued cloud momentum.

Google on AI Integration

Analysts expect Alphabet to report revenue growth of around 10% to 15% YOY for Q1 on Thursday, driven by increased advertising, cloud, and YouTube revenue. Google Cloud revenue is forecast to increase by 24.1% to $9.25 billion, YouTube ads revenue by 15.1% to $7.71 billion, and advertising revenue seen growing 10.3% to $60.18 billion. The company has beaten earnings estimates in each of the past four quarters.

Google makes most of its revenue from advertising but is trying to diversify into areas like cloud, hardware, and AI. It is investing heavily in AI, with capital spending estimates up 25% for 2024 as the company integrates AI into more of its products. Any updates on its AI initiatives after announcing its in-house custom AI chip may be in focus. Commentary on how generative AI may impact search advertising revenue might also be a focus, as might whether cloud revenue can see continued growth.

MSFT in Double-Bottom

Microsoft's share price recently rose after forming a double-bottom around the $400 handle. If gains halt around $420, it could develop a head-and-shoulders pattern, opening the door to potential future declines towards $380 and $365. However, if prices accelerate past the expected resistance of $420, this would suggest further increases beyond $430, opening the possibility of visiting the $450 and $500 handles in due course.

Source: SpreadEx / Microsoft

Key Takeaways

Both Microsoft and Google will report their earnings this week, and investors will pay close attention to their progress in cloud computing and artificial intelligence initiatives. Microsoft's focus will likely be on its cloud division, Azure, and updates on how Microsoft is integrating AI into its cloud products. For Google, analysts expect continued revenue growth from advertising, YouTube and Google Cloud. Investors will look for updates on Google's AI initiatives and progress with its custom AI chip. How generative AI may impact advertising revenue will also be a key focus.