Yes, Microsoft is a star AI stock, but this is what really powered its solid second-quarter results

Deep involvement with artificial intelligence (AI) has made the company popular with investors, but that isn't (yet) the top motor of its growth.

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This article was originally published on All figures quoted in US dollars unless otherwise stated.

The rage for artificial intelligence (AI) stocks is showing no signs of cooling off. That's why Microsoft (NASDAQ: MSFT) management made sure to mention AI tech prominently in both the press release and during the conference call detailing its fiscal second quarter of 2024 earnings. 

Those results, divulged just after market hours on Tuesday, beat analyst estimates and featured some impressive numbers. And while AI certainly played a part in that, it was actually another set of offerings from the tech giant that really gave its quarter some muscle.

No cloudy skies with the cloud

Microsoft's second frame of the fiscal year saw the company book slightly over $62 billion in revenue, which was a sturdy 18% improvement over the same quarter of fiscal 2023 and topped the company's guidance of $60 billion to $61 billion. Not to be outdone, non-GAAP (adjusted) net income advanced by 26% year over year to hit nearly $22 billion ($2.93 per share).

Analyst expectations for the quarter were relatively modest. On average, they were expecting the tech giant to earn slightly over $61 billion on the top line, and post a per-share, adjusted net income figure of $2.78.

Microsoft posted estimate-beating quarters throughout calendar 2023, but the rise in its shares was due more to its association with top AI app developer OpenAI. Microsoft is a major investor in -- and partner of -- the company, which is the entity behind the popular ChatGPT app. Microsoft has assertively incorporated OpenAI functionalities into more than a few of its offerings, including the Office software suite.

In the earnings release, the only quote Microsoft attributed to its CEO Satya Nadella was about, yes, AI. The company's leader briefly enthused about the technology, saying that by applying it at scale, it's helping to gain new clients and improve productivity throughout its operations.

What didn't get as much attention, and probably should have, was Microsoft's cloud computing products and services. The company is the No. 2 provider of such offerings -- behind Amazon's mighty Amazon Web Services (AWS) -- and is doing well in drawing fresh revenue from this source.

During the quarter, the company's Intelligent Cloud business segment saw its revenue balloon by 20% year over year to nearly $26 billion. Inside that grouping, the still-hot Azure and other cloud services saw their collective take rise at a 30% clip, outpacing the analyst expectations of under 28%.

The AI and cloud combination is already potent

Even if AI -- still a relatively young technology -- wasn't a mighty driver of Microsoft's growth for the quarter, it still made a difference. The company said it now has about 53,000 clients for Azure AI, its anchor cloud-based AI platform. Nadella said that one-third of that figure comprises customers new to Azure within the past year.

This portends very well for Microsoft's future. However, judging by the market's rather tepid reaction to the quarterly results -- the stock was trading slightly down after hours as of this writing -- investors haven't yet fully considered this potential. So even though the company's shares zoomed higher in 2023, in this year and beyond, they can certainly hit even loftier heights. 

This article was originally published on All figures quoted in US dollars unless otherwise stated.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Microsoft. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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