Microsoft earnings are coming up. Here’s what traders are looking for in the report

Microsoft will put its reputation as one of the key stocks in the market rally and in the AI race to the test with its latest quarterly report, due out after the bell Thursday. Shares of the tech giant are holding on to a nearly 5% gain year to date, though they have slumped more than 7% so far in April. MSFT YTD mountain Shares of Microsoft were up more than 7% for the year through April 24. Investors will be looking to see if Microsoft's report can restart the rally, but the bar for success might be high. After the company reported its fiscal second-quarter results in January, the stock fell more than 2% in the next session despite a beat on the top and bottom lines. The AI narrative Microsoft is viewed as one of the companies best-positioned to take advantage of recent advances in artificial intelligence. The main area of optimism right now is Azure, the company's cloud division. The demand for cloud is expected to increase, as AI requires high amounts of computing power and data storage. Another area is Copilot , the AI tool that Microsoft is packaging with its Office suite of software products. Investors and analysts will be looking to see how those AI businesses are performing already and how quickly management expects them to grow. “Generally, we expect a gradual adoption to ramp starting in [the second half of the 2024 calendar year], with more material adoption and rev uplift in [calendar year 2025],” Jefferies analyst Brent Thill said in a note Wednesday. “That said, we expect AI contribution to Azure growth to increase w/ our checks pointing to strong demand for Azure AI services & elevated workloads as more models go into production. We will want to see signs supporting strong adoption of MSFT's Copilots and traction towards its $10B AI [annual recurring revenue] goal which we expect it to achieve in F4Q,” added Thill, who has a buy rating on the stock. The numbers to beat Even if the full impact of AI is still far off in the future, Wall Street analysts are expecting a sizable earnings jump for Microsoft for its fiscal third quarter. Analysts surveyed by LSEG are expecting $2.82 in earnings per share on $60.8 billion of revenue. Both metrics would be up 15% year over year. Wall Street is overwhelmingly positive on the stock, with more than 90% of the analysts covering Microsoft giving it a rating of “buy” or “strong buy,” according to LSEG. Digging deeper Beyond the headline numbers, there are a few key segments that analysts have highlighted in the runup to the earnings release. One is the revenue growth for Azure, and specifically how much of that is driven by AI. The company said in January that its Azure and other cloud services sector grew revenue by 30% year over year in its fiscal second quarter. “Based the on the nearly $400M Q/Q increase in AI workloads in the December quarter (~6% of Azure venue vs 3Q in Sept) we expect management to point to well in excess of $1B of quarterly Azure AI revenue in March,” Stifel analyst Brad Reback wrote in a note to clients Sunday. Reback has a buy rating for the stock. Some potential areas of concern for Microsoft include its rate of capital spending and exposure to a potentially weakening part of the economy. “MSFT has more [small- and medium-sized business] and consumer exposure than any other stock we cover and while those cohorts have held up surprisingly well during this soft macro period, we are starting to see some indications of weakening demand from them,” Guggenheim analyst John DiFucci said in a note Sunday. DiFucci has a neutral rating on the stock. — CNBC's Michael Bloom contributed reporting.