ii view: Microsoft benefits from cloud growth and AI boost

First-quarter results to 30 September

• Revenue up 13% to $56.5 billion year-over-year
• Net income up 27% to $22.3 billion
• Earnings Per Share (EPS) up 27% to $2.99
• Returned $9.1 billion to shareholders

Chief Executive Satya Nadella said:

"With copilots, we are making the age of AI real for people and businesses everywhere. We are rapidly infusing AI across every layer of the tech stack and for every role and business process to drive productivity gains for our customers.”

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ii round-up:

Windows software maker Microsoft Corp (NASDAQ:MSFT) detailed quarterly earnings which beat Wall Street hopes, with sales growth at its intelligent data cloud business accelerating from the previous quarter. 

First-quarter earnings of $2.99 beat forecasts for $2.65 per share, with cloud revenues potentially hosting Artificial Intelligence (AI) software for customers, rising 19% year-over-year to $24.3 billion from growth in the previous quarter of 15%.

Shares in the Dow Jones and Nasdaq 100 company rose more than 5% in afterhours US trading having come into this latest announcement up 38% year-to-date. That’s similar to iPhone and online music and streaming provider Apple Inc (NASDAQ:AAPL) and ahead of a 26% gain for the tech-heavy Nasdaq Composite index. 

Overall, Microsoft revenues for the quarter rose 13% to $56.5 billion. Sales at its Productivity and Business Processes division, including its Office 365 software, climbed 13% to $18.6 billion. 

Customers using its Azure Cloud Open AI Services rose from around 11,000 in July to an end of quarter 18,000. In 2022, Microsoft helped launch the ChatGPT AL facility.   

Management continues to forecast further overall sales growth, with revenue for the current second quarter expected to rise by around 15% year-over-year to between $60.4 billion and $61.4 billion. That’s potentially ahead of current Wall Street forecasts of $60.9 billion.

Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares following the numbers, highlighting Microsoft as a ‘top pick’. 

ii view:

Started in 1975, today Microsoft generates annual sales of over $210 billion. Its corporate focused Intelligent Cloud business generates its biggest slug of sales at around two-fifths, followed by Productivity and Business Processes at close to a third and Personal Computing the balance. Geographically, sales are divided almost evenly between its home US market and overseas nations.

For investors, the difficult economic backdrop for its customers including heightened borrowing costs could see them at least looking to limit IT spending. Costs for businesses generally remain elevated and the tailwind from the pandemic has now passed. Microsoft’s failed venture into mobile phone software has also left it void of the most important consumer computing device of all, the mobile phone, now dominated by Apple and Alphabet Inc Class A (NASDAQ:GOOGL)'s Android software. 

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More favourably, cloud data sales, potentially hosting its customer’s own AI related software, have accelerated this quarter. Its Open AI backed ChatGPT is already the most recognised AI facility, while its continued domination of corporate software via Windows and Office gives it a significant foot in the door to sell other services such as cloud and security provision. 

While future AI related growth is far from guaranteed and there are serious questions about valuations of some of these tech giants, Microsoft is a class act and core component of many diversified portfolios. A consensus analyst estimate of fair value at close to $395 per share also implies confidence in the business on Wall Street.

Positives: 

• Windows operating system holds a dominant market position
• Growing cloud business

Negatives:

• Uncertain economic outlook
• Political concern remains regarding the size and power of tech companies

The average rating of stock market analysts:

Buy