ii view: Microsoft outlook hobbled by supply constraints
Investing heavily in AI-related infrastructure and with a foot in the corporate door via its Windows operating software. Buy, sell, or hold?
31st October 2024 11:32
by Keith Bowman from interactive investor
First-quarter results to 30 September
- Revenue up 16% to $65.6 billion year-over-year
- Net income up 11% to $24.7 billion
- Earnings per share (EPS) up 10% to $3.30
- Returned $9 billion to shareholders, up from $8.4 billion in the prior fourth quarter
Chief Executive Satya Nadella said:
“AI-driven transformation is changing work, work artifacts, and workflow across every role, function, and business process."
“We are expanding our opportunity and winning new customers as we help them apply our AI platforms and tools to drive new growth and operating leverage.”
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ii round-up:
Tech giant Microsoft Corp (NASDAQ:MSFT) detailed first-quarter sales and earnings that beat Wall Street forecasts, but with future sales estimates shy of hopes due to the late delivery of datacentres by external suppliers.
Microsoft expects current second-quarter sales of around $69 billion, below analyst estimates of nearer $70 billion. Capital expenditure for the quarter to late September totalled $20 billion, up from $11.2 billion a year ago. That came as Microsoft ramped up spending on datacentres and expensive NVIDIA Corp (NASDAQ:NVDA) supplied computer chips to host AI software for industries such as banking.
Shares in the Dow Jones and Nasdaq 100 company dipped 3% in afterhours US trading having come into this latest news up 15% year-to-date. That’s ahead of an 11% increase for the Dow index itself, but way below a 180% increase for Nvidia shares.
Microsoft operates across the three areas of intelligent cloud, productivity and business processes including its Windows and Office software, as well as personal computing taking in products such as gaming and the X-box.
Intelligent cloud related sales in the first quarter rose 20% year-over-year to $24.1 billion. Productivity revenues climbed 12% from Q1 last year to $28.3 billion, with personal computing sales up 17% at $13.2 billion.
Overall group revenue up 16% to $65.6 billion beat forecasts for $64.5 billion, pushing earnings 10% higher to $3.30 per share and ahead of Wall Street estimates of $3.10 per share.
Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares post the results, raising its fair value share price target to $548 from $506.
ii view:
Began in 1975 by Bill Gates and Paul Allen, Microsoft came to the US stock market in 1976. The software maker famed for its Windows operating product regularly competes with iPhone maker Apple Inc (NASDAQ:AAPL) and computer chip maker Nvidia as the USA’s largest company by stock market value. America remains its biggest generator of sales at 51%, with the balance of 49% spread globally and including the UK.
For investors, the rush for AI exposure and potential dominance now looks to be facing some supply chain constraints. Competition to host AI software on datacentre servers for customers is intense, with rivals such as Alphabet Inc Class A (NASDAQ:GOOGL), Amazon.com Inc (NASDAQ:AMZN), International Business Machines Corp (NYSE:IBM) and Oracle Corp (NYSE:ORCL) all competing hard. Government concerns about big tech monopolies has not gone away, while Microsoft’s previously failed venture into mobile phone software has arguably left it void of the most important consumer computing gadget of all, the mobile phone, now dominated by Apple and Alphabet’s Android software.
To the upside, investment in AI infrastructure is ongoing. Although not wholly owned by Microsoft, the company does have a working relationship with AI software provider ChatGPT, along with its own Copilot software offering. The group’s domination of corporate software via Windows and Office gives it a firm foot in the door to sell other services such as cloud and security provision, while it enjoys both product and geographical diversity.
On balance, and while future AI growth is far from certain, this tech titan remains worthy of consideration for many diversified investor portfolios.
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
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