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Investing.com - Microsoft’s margins from its artificial intelligence operations are likely to improve over time, supporting the software giant’s long-term potential, according to analysts at Bernstein.
Despite soaring enthusiasm around the possibilities of AI, some investors have expressed concerns that Microsoft’s (NASDAQ:MSFT) heavy investments aimed at developing the nascent technology -- and staying ahead of its tech industry rivals -- will evolve into a pricey endeavor that ultimately places pressure on profit margins.
Meanwhile, Microsoft’s move to cancel data-center leases was interpreted by some observers as a possible indication of excess capacity. Worries have also swirled around whether economic uncertainty stemming from erratic U.S. tariff policies could be prompting businesses to rein in expenditures on AI, cooling a long-standing spike in demand for the technology.
But Microsoft’s most recent results partly helped to quell these fears, with the company announcing a 33% jump in revenue at its AI-enhanced Azure cloud division in the quarter ended on March 31. AI accounted for 16 percentage points of the uptick, compared to 13 percentage points in the prior quarter, Reuters reported, citing Visible Alpha data.
Commercial bookings growth, a measure of new contracts signed with business clients, also moved up by 18% in Microsoft’s fiscal third quarter, thanks in large part to a new deal inked with ChatGPT-maker OpenAI.
Meanwhile, Microsoft’s gross margins from AI have reached roughly 40%, improving by between 40-45 basis points over the previous four quarters, the Bernstein analysts led by Mark Moerdler said in a note to clients.
"The question is what happens over the next five years as AI becomes a far larger portion of revenue," the Bernstein analysts wrote.
Although the strategists argued that there are "too many unknowns to estimate margins" so far out, "AI margins [are] likely [to] improve over time".
"Even if AI margins do not improve and company gross margins are impacted by AI, Microsoft should be able to drive operating leverage and deliver flat to up operating margins over the next five years."
Given these assumptions, the analysts reiterated an "outperform" rating for Microsoft shares and named the stock as one of their "top picks".
(Reuters contributed reporting.)