TLDR
- Microsoft reports Q4 earnings Wednesday with all 20 analysts rating the stock a “buy” and consensus price target around $580
- OpenAI is diversifying cloud providers, adding Google Cloud and Oracle alongside Microsoft’s Azure services
- The Microsoft-OpenAI partnership is being renegotiated as OpenAI eyes going public, creating uncertainty about future access to ChatGPT technology
- Microsoft’s Azure revenue expected to grow 34.8% in Q4, driven by AI demand and the OpenAI partnership
- Wall Street expects 14% revenue growth to $73.86 billion and earnings of $3.38 per share for the quarter
Microsoft reports its fiscal fourth-quarter earnings Wednesday evening, with investors laser-focused on the company’s AI strategy. The tech giant’s partnership with OpenAI has been a key growth driver, but recent developments suggest changes ahead.
All 20 analysts covering Microsoft have “buy” ratings on the stock. Their consensus price target of around $580 implies 13% upside from Monday’s close above $512.
The stock hit a record high Friday at $513.71. Microsoft shares have gained more than 20% this year.
Wedbush recently raised its price target to $600, calling Microsoft a “Best Ideas” pick. The firm says the company is entering its “next phase of monetization on the AI front.”
Wall Street expects quarterly revenue of $73.86 billion, up 14% year-over-year. Net income is projected at $25.27 billion, or $3.38 per share, compared to $22.04 billion a year earlier.
OpenAI Relationship Under Pressure
The exclusive licensing deals with OpenAI have made Microsoft one of the biggest winners in the AI boom. These agreements fueled growth in Azure cloud services and pushed Microsoft’s market value toward $4 trillion.
Azure revenue is expected to jump 34.8% in the April-June quarter. This matches company forecasts and exceeds the 33% growth from the previous quarter.
But OpenAI is now diversifying its cloud providers. The AI company recently added Google Cloud to its supplier list for computing capacity.
OpenAI also deepened its Oracle partnership with plans for 4.5 gigawatts of data center capacity. This represents a shift from relying primarily on Microsoft’s infrastructure.
The Microsoft-OpenAI deal is being renegotiated as OpenAI prepares for a public listing. Media reports suggest disagreement over Microsoft’s future access to ChatGPT technology.
OpenAI wants to convert into a public-benefit corporation. This conversion requires Microsoft’s approval and is crucial for a $40 billion funding round led by SoftBank.
$20 billion of that funding depends on completing the restructuring by year-end. The talks have reportedly reached a deadlock.
Analyst Confidence Remains High
UBS analysts say investor views on the Microsoft-OpenAI partnership are divided. However, they believe Microsoft holds the upper hand in negotiations.
“Microsoft’s leadership earned enough credibility such that the company will end up negotiating terms that will be in the interest of its shareholders,” UBS said.
Citi analysts called Microsoft their “top pick” with a $613 price target. The bank highlighted Microsoft’s pricing and margin power as “nearly unmatched in enterprise software.”
Jefferies issued a $600 price target earlier this month. Revenue from Microsoft’s Intelligent Cloud segment is expected to grow 22% to $28.96 billion.
Capital spending will be closely watched after Alphabet raised its annual outlay by $10 billion last week. Microsoft signaled continued capex growth in April after planning over $80 billion last fiscal year.
The company remains capacity constrained on AI services. CFO Amy Hood said capital expenditures are expected to grow this fiscal year but at a slower pace than fiscal 2025.
Dan Morgan from Synovus Trust, who owns Microsoft shares, said the AI spending is paying off. “Investors may still be underestimating the potential for Microsoft’s AI business to drive durable consumption growth in the agentic AI era,” he said.
Microsoft likely benefited from a weaker dollar and stronger non-AI Azure demand in Q4. PC makers also pulled forward Windows orders ahead of possible U.S. tariffs.
The company’s fiscal fourth quarter ended in June, with revenue expected to show its best growth in three quarters at 14%.
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