Microsoft Q2 Preview: Azure & Capital Expenditures in Focus, AI Drive PC Upgrade Cycle?

Following years of transformation, Microsoft has evolved from a traditional Windows OS company into a leading cloud service provider, with its Intelligent Cloud segment now the company's primary revenue driver. This earnings report's biggest highlight will undoubtedly be the growth of Microsoft Azure.

In Q3 2024, Azure held a 20% global market share, ranking second behind Amazon AWS. However, it still trails AWS by a significant margin. With OpenAI's momentum, can Microsoft capture more cloud market share?

Speaking of cloud computing, the White House recently unveiled the Stargate initiative, with Microsoft participating as a technology partner. However, it is no longer OpenAI's exclusive cloud provider, retaining only a "preferred" status.

Market analysts point out that Microsoft still retains a revenue share from OpenAI and remains its largest investor, with little impact on its monetization capabilities. The shift away from exclusivity may indicate that Microsoft wants to cut back on aggressive infrastructure spending, improving profitability.

Capital Expenditures

Capital expenditures will also be a key focus. Meta recently announced a sharp increase in CapEx, suggesting Zuckerberg sees a major opportunity. Will Microsoft follow suit? A conservative approach could risk falling behind in the AI race, but continued heavy spending might concern investors. Striking the right balance between AI investments and returns is a crucial challenge for Microsoft.

Will AI Drive a PC Upgrade Cycle?

Beyond cloud services and CapEx, Windows and PC hardware sales will provide insight into the recovery of the personal computing market. Several investment banks expect AI-powered features to drive an upgrade cycle for smartphones and PCs. Will that materialize? Apple's and Microsoft's earnings will offer critical clues.