Microsoft Investors Eye Cloud Strength

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00:00Interesting in Microsoft trading down a bit today, but yesterday really got a lift past $4 trillion market capitalization

00:06because we thought that clarity is there in terms of relationship with OpenAI.

00:10What clarity do you want from the numbers tonight?

00:13The tech investing market is going to be focused on Microsoft's CapEx.

00:18We're a billion above street at $31 billion and expecting more than $125 billion this fiscal year from Microsoft.

00:25Microsoft investors are clearly focused on two things.

00:28It's Azure growth. Can the reacceleration continue?

00:31We've seen really strong net new Azure revenue trends over the past couple of quarters from the company,

00:36as well as what you're alluding to, the OpenAI relationship.

00:39We caught it a sigh of relief yesterday just that that announcement is out and we're seeing you saw the stock react well yesterday.

00:47Just some signs that the companies are working more closely together still after, I think,

00:51a lot of back and forth around what's happening between the two companies right now.

00:55Michael, based on your model for Microsoft, has this unknown about the relationship with OpenAI really been an overhang on the stock?

01:04I think it's the first time in a long time we've started to field questions on cloud market share.

01:12Azure has been the dominant market share gainer since ChatGPT took the world by storm.

01:17We've seen Azure just continue to outpace growth of the other hyperscalers.

01:23We're talking about a business that's approaching $100 billion of annual revenue, growing near 40%.

01:28These are unprecedented rates, but with some of the deals that we've seen announced away from Microsoft starting to show up,

01:37there have been questions around just the size and scale of the aspirations of OpenAI

01:41and how much of that accrues to Microsoft versus the broader cloud hyperscaler ecosystem.

01:48So, you know, we think the fact that this is...

01:50No, this is the conversation. Let's do this.

01:54So, GCP has a 1 million TPU deal with Anthropic.

01:59Microsoft has started having a relationship with Anthropic.

02:02AWS and Bedrock is kind of thinking, well, what else can we offer?

02:06Grok is now available on Azure, I think.

02:09Basically, the landscape's changed.

02:12Does the hierarchy change now?

02:14AWS, Azure, GCP?

02:16I mean, we think Microsoft still has the lead in terms of market perception.

02:21That relationship with OpenAI has been very advantageous.

02:24So we think Microsoft share gains have been primary a function of two reasons.

02:28Number one, just the later stage movers to cloud are disproportionately more skewed towards Microsoft

02:34and more traditional businesses, whereas Amazon won the early adopters.

02:38Microsoft's seen the next wave come to cloud.

02:40And then the relationship with OpenAI has really improved the perception of innovation within Azure

02:45and created an environment where startups are building using Azure really for the first time.

02:50And I think everyone wants access to OpenAI's technology, which is embedded into Copilot.

02:55You can directly tap the OpenAI API through Azure.

02:58That's an exclusive agreement.

03:00Those things are holding firm, so we're still very confident in Microsoft's position.

03:04But the world has changed.

03:05What we underestimated was just how big the size of just a training market would be within the AI cloud market.

03:12So we're just seeing growth that we haven't seen in technology in quite a long time.

03:16And to be fair, maybe Microsoft did too.

03:18The issue for them is supply, not demand.

03:20They're having to turn to other companies that you analyze, CoreWeave.

03:22They're looking at Nebius and N-Scale to really be able to fulfill some of its overall cloud needs.

03:28How are you thinking about capital expenditure rising for Microsoft in the next full year, 26?

03:34I mean, we think it continues to go higher.

03:36We're modeling above consensus right now.

03:37We're a billion above consensus for this quarter.

03:39We updated that just based on some of what you're saying.

03:42We hear the capacity constraints in the market.

03:46We hear data center capacity still coming online.

03:49We think the most important thing beyond what Azure presents for the quarter is where they guide.

03:55The December quarter should have a little bit less capacity constraints.

03:59So I think investors will be listening carefully to see how they characterize Azure growth for December as well.

04:04But you're right.

04:05This is a good problem to have for Microsoft in many ways.

04:07We have a business that we're saying is $100 billion in scale and can't even keep up with demand right now.

04:13Just unprecedented levels of interest.

04:16What about, though, the productivity tools?

04:18How much of a lock-in does it have because of the software?

04:22We can't get away from it.

04:24I think it's been the toughest moat to crack in software.

04:27We've seen many companies try, and the honest truth is we've just all been conditioned to work in Microsoft and very effectively.

04:35Co-pilot is a way to extend.

04:37I think the productivity use case that is pretty interesting from the numbers perspective.

04:41Investors are focused in on Microsoft 365 commercial cloud, which does embed the co-pilot metrics as well.

04:48That business is forecast to grow 13% to 14% this quarter.

04:53Any upside would likely be attributed to co-pilot and could create, I think, the next big unlock for Microsoft.

04:59The productivity business could start to show growth improvement alongside Azure.

05:03The productivity business could start to grow.

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