How Microsoft is in 'the pole position' for next gen AI PCs

Microsoft (MSFT) posted its latest quarterly earnings showing revenue increased nearly 18% year-over-year to $62.02 billion, beating Wall Street expectations of $61.14 billion. The personal computing segment of this business, which includes Windows, Surface, Bing, and Xbox, contributed to $16.89 billion in revenue, beating Wall Street expectations of $16.79 billion.

With the advent of AI-powered PCs, questions arise around the impact of Microsoft PC sales and how the company will operate moving forward with this new tech.

Ted Mortonson, Baird Technology Desk Sector Strategist, joins Yahoo Finance to give insight into Microsoft's potential with AI-powered PC's and the impact it may have on sales.

Mortonson explains Microsoft's advantage with this next generation of tech: "When you put the gen AI infrastructure into place, and we're doing it right now, I mean, you looked at results like last night with SMCI just absolutely annihilating the number on servers, but as you go forward, we're gonna have to upgrade not only handsets but the PC. We are going to start hearing this term of 'generative IOT devices,' in the '25, '26 time frame, you're going to have to see most PCs being upgraded to have gen AI functionality. What that means is, you're going to have a combination of GPUs, CPUs, and other accelerators on that next generation PC... So, Microsoft is in the pole position to leverage not only through Azure that but, the gen AI PC cycle where every PC in the world will eventually have to be upgraded."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video transcript

JULIE HYMAN: Let's turn it on over to Microsoft for a moment here. And it looks like, by the way, the shares have actually turned higher in after hours trading, I believe, after an initial kind of dip here. The company, as far as we could tell, beating on most of the metrics here.

And also, as I kind of pointed out a little bit tongue in cheek, Satya Nadella, the CEO, saying AI three times in his sentence in the release here. The share is actually little change right now, so let's call it bouncing between gains and losses. What's your sort of high-level takeaway here when we look at Microsoft?

TED MORTONSON: Well, if you look at most of their results are in line, I think the standout is the Azure growth. They don't break in. They're hosting essentially all the OpenAI infrastructure. So a 28% constant currency when they guided to 26 to 27 is pretty powerful.

And as you look at their-- and this is why we have to listen to the call and also the guide, the Street's very, very focused on how Satya and the team monetize generative AI from an ASP perspective. That's into Office, that's into all their Copilot offerings. Whether it be on the developer side, whether it also be on Office 365, their whole product line is being AI enabled. So the million-dollar question in some of the metrics that we'll get, if enterprises are willing to pay an additional fee per seat to get that AI functionality, I think, is just a matter of time. It's not a matter of if.

JOSH LIPTON: And Ted, another, of course, very important variable for Microsoft is the PC market in 2024. I know that's a source of some debate on the street, what the trajectory of that market looks like. What would the more positive PC cycle mean for Microsoft, Ted?

TED MORTONSON: Well, listen, we're going into when you put the gen AI infrastructure into place and we're doing it right now. I mean, you looked at results like last night with SMCI just absolutely annihilating the number on servers. But as you go forward, we're going to have to upgrade not only handsets, but the PC.

And we're going to start hearing this term of generative IoT devices. And that essentially in the '25, '26 time frame, you're going to have to see most of PCs being upgraded to have gen AI functionality. And what that means is you're going to have a combination of GPUs, CPUs, and other accelerators on that next-generation PC where that actual what's called smaller language models or SLMs will execute. And they'll execute on the device.

So Microsoft is in the pole position to leverage not only through Azure, but that Gen AI PC cycle where every PC in the world eventually will have to be upgraded. And then on the handset side, that's no different. And that's where names like Qualcomm come into space and we'll see their report tomorrow. But we're moving to a gen AI IoT environment and the architectures are changing. And a lot of these large cap companies are extremely well positioned to leverage their R&D and free cash flow to make it happen.