Cloud, AI, PCs: Here's Our Take on Microsoft Earnings

* Wall Street reacts to Microsoft’s Azure revenue miss, but we found its AI comments more insightful.

* Microsoft will scale its capital spending further, a positive for Nvidia and Marvell.

* More Co-Pilot+PCs are coming, giving our Qualcomm shares more runway.

* Lockheed Martin shares catch an upgrade and new target from BofA.

Microsoft MSFT shares are under additional pressure following the company’s June-quarter earnings report which was largely in line with expectations but also slightly slower-than-expected cloud growth and confirmation that its fiscal 2025 capital spending will be above fiscal 2024. While the latter was no surprise given growing speculation about Microsoft’s goal to double cloud revenue in the next few years, the 29% cloud revenue growth in the quarter was below the 30%-31% guidance discussed on its last earnings call.

Quarterly performance can be lumpy given contract timing, and management shared that it did see lower-than-expected cloud growth in some European areas. However, what stood out to us was the comment that 8 points of its cloud growth was due to AI services, and demand for those services remains above Microsoft’s current capacity.

What was evident during Microsoft’s earnings call was the growing number of firms that are adopting Microsoft’s various AI tools. Whether for its security offering, Microsoft 365, or its Studio extension, companies ranging from Carnival CCL, Cognizant CTSH and Eaton ETN, to KPMG, Majesco and McKinsey are among the 50,000 companies that have rolled out Studio. As it relates to the number of customers with more than 10,000 seats, that number more than doubled quarter-over-quarter, and now includes Capital Group, Disney DIS, Dow DOW, Kyndryl KD, and Novartis NVS. And EY alone will deploy Copilot to 150,000 of its employees.

This backs our thinking that as AI adoption ramps, we will see greater demands placed not only on the data center but also on other aspects of digital infrastructure. This also explains the ramping capital spending plans that should benefit our positions in Nvidia NVDA and Marvell Technology MRVL as well as the ramping capital spending that Alphabet GOOGL announced for Google Cloud. We continue to see something akin to an AI arms race and expect to see capital spending plans lifted at Amazon AMZN and Meta META when they report their quarterly results this week.

As it relates to the PC upgrade cycle, Microsoft rattled off a growing number of companies adopting Windows 11 and shared more Copilot+PCs models will be launched in the coming months. We see that supporting this new vertical at Qualcomm QCOM.

As it relates to our thoughts on MSFT shares, we are seeing several firms re-jigger their price targets lower in response to last night’s earnings call. Those targets are moving to $480-$500 from $510-$520, and odds are given the volume of coverage MSFT shares receive, we’re going to see further price target movement. We will maintain our $480 price target but would suggest members who are interested in picking up some additional shares wait until the shares settle from last night’s earnings report.

BofA Upgrades Lockheed Martin

Earlier today, BofA upgraded Lockheed Martin LMT shares to "Buy" from "Neutral" with a price target of $635, up from $465. The firm’s thought process centers on a familiar topic — Lockheed's upgraded F-35s with Tech Refresh-3 packages have restarted deliveries. Not new news for us, but BofA’s price target likely hinges on delivery levels in 2025 and beyond, something the company has not yet discussed with the investment community.

Given past delays with the F-35 program, call us over conservative but we will revisit our recently boosted $540 target once Lockheed presents its multi-year delivery forecast later this year. We acknowledge there is upside to be had, the question is how much and that will hinge on the F-35 delivery ramp into 2025.

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At the time of publication, TheStreet Pro Portoflio was long MSFT, NVDA, MRVL, QCOM, GOOGL, AMZN and LMT.