Microsoft Earnings Show AI Demand Still Strong: RBC's Jaluria

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00:00Good to have you with us. You think about the numbers that we got. It was a beat when it comes

00:04to total revenue, when it comes to profit per share. Also, when it comes to Azure and their

00:09cloud computing unit, posting a 39% revenue gain. The estimate had been for 37%, but shares

00:15lower right now. Make it make sense. Yeah, absolutely. Thanks so much for having me.

00:19Look, the short answer to this is this is a very fickle market we're in, right? When

00:23anything that's AI is trading at all-time highs, as Microsoft was at the close today,

00:29you just have heightened expectations. And this is, I think, a situation of the market

00:33just being a tiny bit fickle, where maybe investors, especially post the open AI restructuring

00:38in the $250 billion Azure deal yesterday, were looking for something more like 40% cost and

00:43currency. Now, don't get me wrong, 39% cost and currency Azure growth is a fantastic number,

00:49especially given the scale of numbers that we're talking about here. You know, this is a very

00:53broad-based beat across the board. I would be surprised if the stock is still down tomorrow

00:57morning. I think it's going to come down to, you know, what Satya and Amy have to say on the call

01:01that begins in about an hour and what the guide, especially on Azure, looks like. But just given

01:06all the moving pieces here, given AI, it really feels like this is really well set up. And if

01:12there is, in fact, a pullback tomorrow morning, we would use it as a buying opportunity.

01:15Yeah, there you have it. For a lot of folks, 39%, you can round it up to 40, not when you're in

01:20such a rare air as we are with these valuations and these price levels. A few notes have pointed

01:26to the fact that you did have first quarter capital expenditures coming in a bit higher than

01:31expectations, coming in at $34.9 billion. That is up from $24 billion in the preceding quarter.

01:38Does that give you any pause?

01:41No, if anything, I think the opposite would give me a little bit of pause, right? Like,

01:44I think it's been clear that Microsoft has been a lot more picky about what sort of physical

01:48infrastructure and CapEx they're willing to commit to. And I think you've seen that play out in deals

01:53that have gone to Oracle Cloud Infrastructure and Microsoft negotiating out the rights of first

01:57refusal that they had with open AI. And so I think they're being a lot more deliberate about

02:01having fungible architecture that can be repurposed, whether it's for training or inferencing or

02:06reasoning. And so to me, the fact that fully burdened CapEx, including capital leases, came in above

02:12expectations is just a signal that there really isn't this slowdown in AI demand that I think everyone's

02:17waiting for, right? I mean, with valuations where they are and kind of AI expectations where they

02:22are, there are worries around that. But I think this is telling us Microsoft is still well positioned

02:27and we know that the team is being very disciplined about their spending. So I'm not worried about the

02:31fully burdened CapEx number coming higher than expectations. They will keep spending as long

02:36as there is demand. And I think, you know, when we're in the middle of a generational technological

02:40shift, I think that's the right thing to do.

02:41There's obviously, when we talk about, Rishi, this idea here of an AI bubble, whether this

02:47spending can continue. There's also been a lot of talk about AI kind of, you know, sucking the air

02:52out of the room for everything else effectively out there. Is that an accurate way of looking at this?

02:58Or are we seeing, I guess, more meaningful dispersion with regards to where money is being invested?

03:04Yeah, look, no, you hit it. You hit it right on the head. We've used this term,

03:07the AI crowding out effect. And the idea is, you know, every board is focused on AI. Every company

03:13is trying to figure out their AI strategy. And so literally that has to be priorities one, two,

03:18and three is how do we, you know, what do we figure out with AI? How do we use this to not only generate

03:22productivity improvements and cost savings, but also over time, make this a competitive advantage,

03:28generate new revenue out of this. And so we're still in the middle of just like AI is the top

03:33priority. And that's where all the time and attention is going. You know, and so I think

03:37that's absolutely happening. It's crowding out other areas of software. Now, Microsoft is well

03:41positioned. I think they're probably one of the few companies that can benefit from AI throughout

03:45the stack. And that puts them, I think, in a very unique situation. But that is absolutely

03:49happening there. In terms of the AI bubble, look, I have no question that we are in an AI bubble when it

03:54comes to, you know, valuations and, you know, the amount of hype around it. At the same time,

03:59I would say this is society changing technology. And even if there's a digestion period that we

04:05have to go through at some point, I believe the way that we use AI 10 years from now will be leaps

04:10and bounds beyond what even your most fervent bull, myself included, can imagine. So it's a matter of

04:16honestly timing and picking and choosing your spots at this point. And for me, I care about really

04:21durable advantages and durable ways to benefit from AI rather than where's the biggest benefit over the

04:27next one or two quarters. As we wait for the conference call, Rishi, what do you want to hear

04:31out of the executives? Yeah, I think I want to hear two things. Number one, I want to hear that

04:35they are committed to co-innovation with open AI. And, you know, with the announcement yesterday,

04:40I think that seems to be indicating that to me. I think the second thing I want to see is that there

04:44is just continued AI demand throughout the stack, that it's not just at Azure, although that would

04:49obviously be great to see, you know, a nice Azure number. And maybe you have more open AI in there.

04:54You have Sora 2 in there, who knows? But if we could start to see evidence that AI is benefiting

04:58them in Office, in Dynamics, at, you know, GitHub Copilot, that they're really showing ways to

05:04demonstrate AI throughout the stack and maybe even seeing the move from pilots to actually in

05:09production. That's what I really love to hear, you know, Satya and Amy talk about on the call in about an hour.

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