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Da Mo: Microsoft wants to shoulder the banner of "AI monetization"

As the AI boom continues to surge, the massive capital expenditures and meager commercial returns are testing investors' patience, and discussions about AI commercial returns are becoming increasingly "hot."

On July 15th, Morgan Stanley analysts Keith Weiss, Josh Bae, and others released the latest research report, discussing the issue of Microsoft's "AI monetization."

Morgan Stanley stated that concerns about Microsoft's AI monetization in the market are putting pressure on the company's stock price. Therefore, for Microsoft, addressing the issue of return on investment may be the company's top priority at present.

The report stated that over the past three months, Microsoft's stock performance has lagged behind that of its large-cap peers and the broader market, reflecting that Microsoft's mid-term prospects in "AI monetization" are underestimated.

However, Morgan Stanley remains confident that core IT spending can drive the growth of Microsoft's AI business in terms of commercial returns, and it is expected that the company's future earnings per share will still have a continuous growth space of tens of dollars.

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AI investments squeeze profits, with AI returns expected to be about 14% this year.

Morgan Stanley indicated in the report that Microsoft's capital expenditures are expected to be even higher, which will have an impact on the gross margin of the AI business to some extent.

The report data shows that Microsoft's total capital expenditures are expected to increase from $32 billion in fiscal year 23 to $63 billion in fiscal year 25, almost doubling.

On this basis, Morgan Stanley estimates that, based on a gross margin range of 50%-70%, Microsoft's implied AI revenue from capital expenditures in fiscal year 24 will be between $5.8 billion and $9.6 billion, rising to $46.5 billion to $77.4 billion by fiscal year 27.

Based on the mid-value of the expected implied AI revenue, Microsoft's AI capital return rate will reach 13.8% this year, and it is expected to jump significantly to 35% next year.However, the report also adds that investments in OpenAI data centers are not included in Microsoft's capital expenditures, which implies that the latter's investment in infrastructure may be much higher than the current level that has been disclosed.

Furthermore, considering the potential exponential growth in investments required for OpenAI to train models in the future, it may intensify concerns about Microsoft's AI capital expenditures.

The report indicates that in the short term, AI capital expenditures will continue to be a headwind for gross margins. It is expected that Microsoft's cloud business gross margin will decline by about 2% year-over-year in the fourth quarter, and it is anticipated that the company's management guidance for a 100 basis point year-over-year decline in operating profit margin for fiscal year 2025 will remain unchanged.

However, in the long run, improvements in operational efficiency may lead to higher profit margins. Microsoft may also support its long-term revenue growth through public cloud adoption, a strong position in the AI field, and the flexibility of its business model.

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