Investment bank Jefferies believes its preferred AI investment, Microsoft, is "aiming for gold in the AI space, not silver," a conclusion drawn after multiple meetings with Microsoft in London.
Key points in these discussions included the ongoing increase in capital expenditure (Capex), the strong performance of Azure, and the promising trajectory of the M365 Copilot program.
Specifically, the company's analysts noted that Microsoft will continue to significantly increase its capital expenditure in fiscal year 2025, a decision driven by confidence in AI demand and supporting its cloud computing and software-as-a-service (SaaS) business.
Despite the significant capital outlay, Microsoft compares this investment with its cloud business. As the scale grows, revenue growth eventually surpasses capital expenditure, resulting in improved efficiency.
Jefferies analysts pointed out: "Microsoft stated that they can always reduce capital expenditure, just as they have done multiple times in the cloud business, but they reiterated that given the current high demand, this is not an issue."
They further added: "We expect that capital expenditure, including finance leases, will increase by approximately 65% year-over-year in fiscal year 2024, reaching $52.65 billion."
Additionally, analysts noted that AI contributed seven percentage points to the growth of Microsoft Azure in the third fiscal quarter. However, the actual impact is even broader, with over 50% of Azure AI customers utilizing Microsoft's data and analytics tools. Jefferies believes this indicates that "the impact of AI on Azure growth and across the entire Microsoft platform far exceeds the mentioned seven percentage points."
Core Azure trends remain healthy, although Microsoft wants to see several quarters of sustained strong performance before making commitments to improve the environment. Analysts noted that the strong growth of core cloud services, beyond just AI, validates the rationale for sustained increases in capital expenditure.
