Hey guys, I'm new to this subreddit and I wanted to throw in my 2 cents for those who are looking to invest in MSFT before their earnings or even right after. Earlier this week, MSFT shares hit a record after the company announced higher-than-expected pricing for its AI copilot software for Microsoft 365—which includes the company’s suite of office applications, like Word, Outlook, Teams and Excel. Shares have rallied 44% so far this year, and with a market cap above $2.5 trillion, the software giant is worth more than any other company aside from AAPL. It has a $1 trillion lead on third-place Alphabet (GOOGL).
This is what analysts are expecting according to Refinitiv:
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Earnings: $2.55 per share, up 14% from a year ago.
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Revenue: $55.47 billion, up 7% from the same quarter a year ago.
7%? Believe it or not, Microsoft will close fiscal 2023 with revenue growth below 10% for the first time since 2017. Businesses have been delaying cloud and software deployments since last year due to economic uncertainty and the potential for higher interest rates. Microsoft CEO Satya Nadella told employees in May that the company won’t lift salaries this year. Despite this, today in this post, I'd like to discuss why I think getting calls. Stifel analyst Brad Reback repeated his Buy rating on Microsoft shares not too long ago, and boosted his target price on the stock to $380 from $320. That's $30 higher than what MSFT is currently at! He focuses on the Technology sector and covers 88 stocks with a pretty decent win rate. Reback says Microsoft should post “solid upside” to its forecast of 26% to 27% growth in the Azure cloud business in the quarter. More on Azure later. He mentions that there's lately been quite a bit of pressure on growth from customers pushing to optimize their spending likely to abate. He also sees strong growth in the Office 365 business. Citi analyst Tyler Radke also repeated his Buy rating on the stock, lifting his target price to $425 from $340. Radke writes that a proprietary reseller survey finds spending growth is likely to accelerate into fiscal 2024. He also covers the tech sector, analyzing 55 stocks.
But this is just two guys. According to a survey conducted by Capital IQ, analysts generally hold a positive view on Microsoft, as evidenced by an average rating of outperform and a diverse set of price targets ranging from $232 to $450. This suggests a consensus among analysts that Microsoft’s stock has the potential to deliver strong returns.
This is what I'm going to be paying attention to during the earnings call:
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Commentary on macro conditions: The demand environment and any macro pressures set the tone for other enterprise software vendors.
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Financial performance within consumer-facing areas: I'll be keeping an eye out for commentary on financial performance within areas like Bing, advertising, Windows, gaming, and LinkedIn. These came back stronger than expected last quarter and meaningfully contributed to overall good results.
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Impact of layoffs: Microsoft quietly did another round of layoffs, so we will be looking for more information on where those cuts were and what the margin impact will be.
This quarter marks the end of the Microsoft’s fiscal year, so the company is likely to provide some commentary on the outlook for fiscal 2024. I expect Microsoft to focus on growing contributions from artificial intelligence, with contributions from both Azure and the new AI Copilot software for the Microsoft 365 suite of office applications. I think the guidance will call for double-digit revenue percentage growth, excluding any contribution from the pending acquisition of Activision Blizzard (ATVI). More on this later.
Gaming
Microsoft's gaming division offers consumers a range of products, including Xbox consoles, games, accessories and Xbox Live subscriptions. This combined with gaming on Windows computers helped Microsoft achieve a huge share of the gaming market in the past few decades. First-party intellectual properties like Halo, Gears of War and Forza Motorsport helped are some of the main drivers of Xbox hardware sales. Unfortunately, while Microsoft has dialed things back the past few years when it came to offering more exclusive titles, it has taken steps in the right direction to win back its gaming audience. From making its Xbox Game Pass subscription service extremely affordable to acquiring more gaming studios like Bethesda and Mojang, it's clear Microsoft is serious about reclaiming its gaming-first positioning in the PC and console space. While Microsoft's gaming division revenue levels aren't at the highs we saw during the pandemic, they are certainly nothing to scoff at given that they remain Microsoft's fourth largest revenue contributor.
Activision deal
The deal is still yet to be finalized between both parties, but I see a clear path forward for Microsoft’s acquisition of Activision, as a federal judge denied the Federal Trade Commission’s motion for a preliminary injunction to halt the deal giving Microsoft 3 more months of breathing room to finalize everything. Microsoft intends to add as much Activision content as possible to Game Pass, which has an estimated 25 million subscribers. Activision has approximately 360 million monthly active users. I tend to think the purpose of deals like this is to gather exclusive content. However, part of the value of Activision is that it develops games across platforms and consoles, so we expect a relatively light slate of exclusive Xbox content over the next several years. We'll want details on the outlook of this $69 billion Activision-Blizzard acquisition.
Cloud Computing
Does anyone here know about the Azure public cloud? The tldr is it's Microsoft's cloud computing platform which competes with Amazon Web Services and Google Cloud Platform. I'm mentioning it because it's a key growth driver for the company. Public cloud is widely considered to be the future of enterprise computing, and Azure is a leading service that benefits the evolution to first hybrid environments and then ultimately to public cloud environments. Analysts predict a 25% year-over-year growth in revenue from the Azure, similar to what analysts expect from Google’s cloud division. I believe due to many workplaces switching to hybrid WFH, azure will be the single most critical revenue driver for Microsoft over the next 10 years.
Subscription Revenue
I believe that Microsoft Office, including both 365 and the perpetual license version, is protected by a wide moat driven by high switching costs and network effects. Office 365 is the cloud-based version of the traditional perpetual license Microsoft Office productivity suite. Office 365 is available for a monthly subscription. Together, the two products account for approximately 26% of revenue and are growing in the low double-digit area. Office 365 represents more than half of Office revenue. I fully think perpetual license sales of Office will continue to decline in terms of both absolute dollars and as a percent of revenue, with growth in Office 365 more than offsetting the declines.
Open AI's ChatGPT
During the quarter, Microsoft built on its broad alliance with OpenAI to capitalize on fresh interest in artificial intelligence, following the November launch of the startup’s ChatGPT chatbot. This gave the company an early edge in the emerging era of generative artificial intelligence. Microsoft introduced a chatbot powered partly by OpenAI language models to help workers make sense of their employers’ data, and it told developers they’ll be able to build plugins that people can access through ChatGPT, the Bing search engine’s chatbot, and other tools. I'd like to see some financial payoff from the company’s AI bets. Today's earnings results will offer us a sense for the actual business demand for emerging forms of artificial intelligence.
Microsoft's Security Products
A high-profile U.S. government breach by a Chinese hacking group is raising new questions about the security of Microsoft products, and its revenue from security tools. The CEO said in January that security revenue surpassed $20 billion annually (up from $15 billion a year earlier), which was about 10% of Microsoft’s $204 billion in revenue in the 2022 calendar year.
Financial Ratios
Now that you're aware of the potential catalysts and roadblocks that Microsoft might face, let's delve deeper and consider the financial ratios of Microsoft to gauge its overall health and fundamentals as a tech giant. The company's trailing twelve-month price-to-earnings (PE) ratio currently stands at 37.48, slightly higher than the industry average S&P 500 PE ratio of 26.37. This possibly indicates that investors are expecting more growth from Microsoft relative to its peers or that the MSFT stock is overvalued compared to its benchmark index.
What about free cash flow (FCF)? Despite heavily investing in growth and emerging market trends, you'll be surprised to know that Microsoft has a healthy FCF balance. At a 5-year average of more than US$50B, Microsoft is fundamentally healthy as a business and is able to spend the amount necessary to guarantee that revenue growth numbers remain high in the long term.
Technical Analysis
Check out this picture. Since breaking through its previous all-time high, MSFT shares seem to have really picked up momentum as volume has been piling in during the past few weeks. Accompanying the increase in trading volume is MSFT stock's recent upward surge that's likely caused by the AI-related rally. Overall, this can be seen as a strong sign of bullish momentum for MSFT stock as investors buy into the excitement that AI presents. The last positive earnings caused a jump of around 7.9%, and the price action has been ascending ever since – indicated by the white trend line. If the rally continues, the current 52-week high can be surpassed to create new highs for 2023. The ascending EMA (yellow line) hints at a rally. However, the RSI at 53.98 suggest a slight drop. If the price goes south, it should bounce off the white trendline. The bulls will be looking for the positive momentum from Microsoft's robust earnings report to bounce off the $350 resistance and possibly head towards greater highs.
Disclaimer
I don't know if I have you convinced but I personally think that MSFT is a long term hold. Buying before earnings is the best bet as the stock might shoot up in after-hours trading today. However, all of this is just for informational purposes only and does not establish financial, investment, or other advice. I plan on making a post on META tomorrow as they'll be having their earnings as well.
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