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June 25, 2024

Microsoft Earnings Soar on Cloud and AI Momentum, Outlook Strong

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Jan 25, 2024

Big Tech Leader Powers Ahead as Transformation Accelerates

Microsoft reported blowout fiscal second quarter 2023 earnings after the market close on Wednesday, driven by strong growth across its cloud, artificial intelligence, and productivity solutions. The software giant beat expectations on both the top and bottom lines and issued upbeat guidance for the rest of the year.

Quarterly revenue jumped 16% year-over-year to $52.7 billion, sailing past analyst estimates of $52.2 billion. Adjusted earnings per share rose 14% to $2.32, topping expectations of $2.29. However, net income of $16.4 billion declined 12% due to foreign exchange headwinds.

Microsoft’s Intelligent Cloud segment continued to lead the way with 24% revenue growth, generating $21.5 billion in the quarter. The crown jewel Azure public cloud surged 31%, maintaining strong momentum amid a shifting IT spending landscape. Server products and cloud services revenue outpaced the overall cloud segment at 35%. “Azure growth remains best in class,” said Amy Hood, Microsoft CFO.

The Productivity and Business Processes unit also shined as Office 365 Commercial and LinkedIn sales grew 7% and 10% respectively, pushing segment revenues up 9% to $17.0 billion. Hood noted broad-based usage intensity across Microsoft 365 and dynamic onboarding from new customers.

Even the legacy More Personal Computing division managed to eke out a 4% revenue increase to $14.2 billion, thanks to a 39% surge in search advertising revenue tied to Windows. Xbox content and services dipped slightly though amid difficult year-ago comparisons.

“Our differentiated offerings continue to drive increased commitment to our platform from customers, contributing to our commercial bookings growth of 18% year-over-year,” said CEO Satya Nadella in the earnings release. “As we continue to transform and build new capability, we are well positioned to capture the opportunities ahead in this rapidly evolving market.”

Full-Year Guidance Raised on Expectations of Resilient Demand

Microsoft issued upbeat guidance for its full 2023 fiscal year, evidence of its confidence that demand from large corporations for its software and cloud services will remain resilient despite growing economic gloom.

Management now expects revenues between $221 billion and $222 billion, up from the prior range of $219 billion to $221 billion. The forecast implies year-over-year growth of 14-15%, a remarkable pace for a company of Microsoft’s size and scale. Operating margins are expected to be essentially flat versus the prior year at 43%.

“While we are not immune to macro trends, the long-term importance of digital technology broadly and cloud in particular continues to expand,” said CFO Amy Hood on the earnings call. She noted that Microsoft is benefiting as companies accelerate their digital transformation plans and shift more workloads to the public cloud.

The dividend was increased by 10% as well, marking the 18th consecutive year of dividend growth for Microsoft shareholders. The company also authorized a new $60 billion share repurchase program with no expiration, replacing the previous $60 billion authorization established in 2019. Microsoft bought back over $8 billion worth of stock during the December quarter alone.

Magnificent Seven Stocks Show Tech Sector Remains Strong

Microsoft’s blowout results and bullish guidance follows similarly impressive performances lately from other tech titans dubbed the “Magnificent Seven.” Fellow mega-caps Apple, Alphabet, Amazon, Tesla, Nvidia, and Meta Platforms have all demonstrated resilience amid 2023’s rocky start for markets, keeping tech sector earnings growth near the top of the S&P 500.

“Big tech has never been bigger,” proclaimed a New York Times analysis titled The Trillionaires’ Stock Market: How a Tech Elite Is Propping Up the S&P 500. Microsoft and the peer Magnificent Seven now account for over 23% of the index, far more concentration than during the heady dot-com days. Their outsized influence helped the S&P 500 briefly reclaim its historic closing high last week after steep declines in 2022.

Company Market Cap 1-Year Return
Microsoft (MSFT) $1.91 trillion + 10%
Apple (AAPL) $2.33 trillion – 7%
Alphabet (GOOGL) $1.19 trillion – 29%
Amazon (AMZN) $979 billion – 35%
Tesla (TSLA) $418 billion – 65%
Nvidia (NVDA) $400 billion – 46%
Meta (META) $366 billion – 39%

However, some analysts caution the dominance of Microsoft and Big Tech peers probably can’t last indefinitely. “Investors will find magnificent 7 cannot keep driving US markets,” warned an editorial in the Gulf News recently. Ralph Silva of Toronto-based SRG warned, “the magnificent seven are going to go through rapid transitions in business model to try and retain their dominance.” Only Microsoft and Apple made his list of top tech stocks likely to outperform over the next decade.

Microsoft CFO Amy Hood acknowledged potential for decelerating growth given tough compares lie ahead. “We do expect some moderation in commercial bookings growth,” she told analysts. Yet optimism still reigns on Wall Street and Microsoft’s long-term thesis remains firmly intact. Of the 44 analysts tracked by Yahoo Finance, 42 rate Microsoft shares a Buy or Strong Buy leading into Thursday’s trading session, with price targets implying 23-37% upside.

“Its transformation into an enterprise cloud software and infrastructure vendor makes Microsoft one of the most compelling stocks in tech,” explains Haris Anwar, Investing.com senior analyst. He believes faster enterprise digitization and cloud migration trends augur well for Microsoft in 2023-2024 alongside sustained double-digit growth for Azure.

Anwar also notes Microsoft trades at a significant discount relative to other tech titans on both trailing earnings (P/E of 25) and projected earnings (P/E of 21). The company expects to return a staggering $67 billion or more to shareholders this fiscal year through dividends and buybacks, around 10% of Microsoft’s total market capitalization. “That makes its stock a very attractive long-term investment as compared to other mega-cap tech names,” said Anwar.

AI Leadership Helps Differentiate Microsoft Cloud

Another key differentiator helping Microsoft stand out relates to its aggressive advancements in artificial intelligence recently. Management called out double-digit revenue growth for Azure AI solutions as a second quarter highlight. Customers are rapidly adopting Azure OpenAI to streamline workflows, enhance customer service, and reduce costs.

“We’re very excited about the opportunities with AI,” said CEO Satya Nadella on the earnings call. “We have absolutely built and are continuing to build world-class AI supercomputing infrastructure.” Microsoft of course owns OpenAI after investing $1 billion initially in 2019, then billions more since alongside other tech titans and VCs.

The startup unveiled its acclaimed ChatGPT conversational AI chatbot in November 2022, supported by Azure in the backend cloud. Microsoft subsequently incorporated ChatGPT features into Bing search and the Edge browser in January 2023. Early feedback proved so overwhelming that usage nearly doubled available Azure capacity, forcing temporary throttling.

Yet the supply constraints proved short-lived as Microsoft quickly deployed additional infrastructure globally. Bing now handles well over 1 billion ChatGPT requests daily with solid reliability as excitement continues building.

Management believes infusing Azure and Office 365 with ChatGPT smarts provides a key competitive differentiator versus Amazon Web Services and Alphabet’s Google Cloud. JPMorgan analyst Mark Murphy concurred, commenting to clients “We believe Microsoft is positioned better than any other Big Tech stalwart to capitalize on generational AI trends.”

Amazon actually called out slower AWS customer spending as pressuring fourth quarter profits when it reported earnings last week. Google Cloud growth similarly lagged Microsoft Azure last quarter. The AI angle indeed seems to be working in Microsoft’s favor so far based on recent momentum.

“While AI will not be material to earnings or revenue this fiscal year, customer engagement is meaningful,” explained Hood. “We expect usage to translate to revenue next fiscal year.”

Outlook Calls for Azure and Cloud Strength in 2024

Most analysts covering Microsoft stock remain overwhelmingly bullish on its prospects over both the near-term and long-term time horizons. Expanding cloud leadership clearly stands out as one of the most important investment thesis pillars going forward alongside enterprise software dominance.

“Its solid inorganic and organic moves to enhance capabilities are helping it rapidly gain customers,” noted Seeking Alpha contributor AP Research. “With organizations moving their workloads towards hyperscale cloud environments, Azure is expected to continue driving Microsoft’s top line.”

As per a Globe & Mail forecast analysis, Azure revenue growth should actually accelerate in 2024 as more businesses migrate mission-critical systems to the public cloud. This view aligns with Microsoft CFO Amy Hood reiterating demand for Azure data center capacity continues outpacing supply. The company plans to operate 100 cloud data centers worldwide by 2025, up from over 60 regions currently.

Software-as-a-service (SaaS) solutions also represent a large recurring revenue pool likely to buoy Microsoft again in 2024. Commercial Office 365 seats jumped 18% last quarter to 373 million as hybrid work trends persist. The overall SaaS market is projected to reach nearly $200 billion by next year per Statista forecasts, suggesting the mix shift away from legacy licensed software still has a very long runway.

On the consumer front, Microsoft’s $68 billion proposed Activision Blizzard acquisition remains under regulatory review but would infuse the Xbox platform with wildly popular video game franchises like Call of Duty and World of Warcraft once approved. The deal could close by June 2023. Microsoft also continues benefiting from PC sales resurgence, as Windows remains the dominant desktop operating system with over 70% market share.

In summary, despite growing macro uncertainty, Microsoft heads into 2024 appearing firmly entrenched among modern tech titans reshaping the future. CEO Satya Nadella concluded his prepared remarks telling analysts, “Even in a world facing increasing headwinds, digital technology will continue to be the enduring driver of economic growth and societal progress.” Few would argue – his company certainly boasts industry-leading capabilities to capitalize.

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AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.

By AiBot

AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

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