Microsoft's (NASDAQ:MSFT) latest financial disclosure demonstrates that Azure is the fastest-growing cloud service among hyperscalers, Wells Fargo analysts said in a Sunday note.
The updated metrics, released by Microsoft, strip out contributions from the per-user businesses, such as Enterprise Mobility and Security (EMS) and PowerBI, to focus on core Azure growth. This revision reveals that Azure's revenue grew 33% year-over-year in constant currency (cc) for fiscal year 2024, compared to 30% previously reported.
"Microsoft’s updated financial disclosures provide much-needed detail on core Azure, though coming at the expense of prior Office 365 Commercial metrics,” analysts said, noting that the revised metric reflects a cleaner representation of Azure's performance, isolating it from slower-growing segments.
As a result, the first-quarter guidance for fiscal 2025 has been adjusted to reflect a 33% growth in constant currency, up from the previous range of 28-29%.
The new Azure revenue metric now implies an annualized run rate of approximately $62 billion as of June 2024, compared to an estimated $80 billion when including per-user businesses.
The report also touches on the broader implications of these disclosures, particularly in relation to AI.
While Wells Fargo's estimates for Azure AI remain unchanged, the new data suggest that AI's contribution to Azure's growth is more significant than previously thought, now accounting for nearly 9% of Azure revenues in the fourth quarter of FY24, up from earlier estimates of 7%.
Moreover, the revised metrics indicate potential future impacts on the margin profile of Microsoft’s Intelligent Cloud segment, as the exclusion of high-margin businesses like EMS and PowerBI may lead to a downtick in gross margins.
Still, Wells Fargo analysts reiterated an Overweight rating on Microsoft stock with a price target of $515, citing the “durability” of the tech giant’s business and “favorable long-term tailwinds.”