Bernstein: Microsoft’s AI business margins are expected to improve over time

According to Bernstein analysts, margins in Microsoft’s AI business are expected to improve over time, which will support the software giant’s long-term growth potential.
Despite the enthusiasm surrounding the possibilities of artificial intelligence, some investors have expressed concern that Microsoft’s (NASDAQ:MSFT) massive investment to develop this emerging technology and stay ahead of its tech industry competitors could end up evolving into an expensive endeavor and putting pressure on margins.

Focusing on generative AI, the highlights of the Amazon Web Services China Summit are a sneak peek
ad
Amazon Web Services

Meanwhile, Microsoft’s move to cancel its data center lease was interpreted by some observers as a possible sign of overcapacity. There are also concerns that economic uncertainty stemming from the erratic U.S. tariffs could prompt companies to cut back on AI spending, cooling a long-standing surge in demand for the technology.
But Microsoft’s recent results have helped in part to alleviate those concerns, with the company announcing a 33% increase in revenue from its AI-enhanced Azure cloud business unit in the quarter ended March 31. According to Reuters, citing Visible Alpha data, AI contributed 16 percentage points of growth, compared to 13 percentage points in the previous quarter.
Commercial bookings growth, a measure of new contracts with enterprise customers, also rose 18% in Microsoft’s fiscal third quarter, thanks in large part to a new deal with ChatGPT developer OpenAI.

Meanwhile, Bernstein analysts, led by Mark Moerdler, said in a note to clients that Microsoft’s gross margin from AI has reached about 40%, up 40-45 basis points over the past four quarters.
“The question is what will happen in the next five years as AI becomes a larger part of revenue,” Bernstein analysts wrote.
While these strategists believe that “there are too many unknowns to estimate” such long-term profit margins, “AI margins are likely to improve over time”.
“Even if AI margins don’t improve and the company’s gross margin is impacted by AI, Microsoft should be able to drive operating leverage and achieve flat or rising operating margins over the next five years.”
Based on these assumptions, analysts reiterated their “outperform” rating on Microsoft stock and listed the stock as one of their “top picks.”
(Reuters reports.) ）