ii view: AI helps Microsoft cloud sales take off
This leader in the software world is now helping its vast array of corporate customers establish and grow their own AI offerings. Buy, sell, or hold?
26th April 2024 15:47
by Keith Bowman from interactive investor
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Third-quarter results to 31 March
- Revenue up 17% to $61.9 billion year-over-year
- Net income up 20% to $21.9 billion
- Earnings Per Share (EPS) up 20% to $2.94
- Returned $8.4 billion to shareholders
Chief Executive Satya Nadella said:
“Microsoft Copilot and Copilot stack are orchestrating a new era of AI transformation, driving better business outcomes across every role and industry.”
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ii round-up:
Tech titan Microsoft Corp (NASDAQ:MSFT) reported sales and earnings beating Wall forecasts, with sales growth for its intelligent data cloud business accelerating from the previous quarter.
Third-quarter earnings of $2.94 beat forecasts of $2.82 per share, with revenues for its intelligent cloud business and potentially hosting artificial intelligence (AI) software for customers, rising 21% year-over-year to $26.7 billion from growth of 20% in Q2.
Shares in the Dow Jones and Nasdaq 100 company are up 3% Friday having come into this latest announcement up 6% year-to-date. That’s ahead of a 1% gain for the Dow itself in 2024 and better than a 12% retreat for iPhone maker Apple Inc (NASDAQ:AAPL).
Overall Microsoft revenues for the three months to late March rose 17% to $61.9 billion, surpassing analyst estimates of $60.8 billion. Profit at its intelligent Cloud business climbed to $12.51 billion from $9.48 billion a year ago and $12.46 billion in the previous second quarter.
Elsewhere, sales at its Productivity and Business Processes division climbed 12% to $19.6 billion, aided by demand for its Office 365 product.
Personal Computing sales pushed 17% higher to $15.6 billion, with Xbox content and services sales up 62% and helped by its Activision acquisition.
Like Google owner Alphabet Inc Class A (NASDAQ:GOOGL) and Facebook owner Meta Platforms Inc Class A (NASDAQ:META), Microsoft continues to invest in product to enable and enhance AI facilities going forward including NVIDIA Corp (NASDAQ:NVDA) chip for datacentres.
Microsoft’s revenue forecast for the current fourth quarter of $64 billion proved marginally shy of Wall Street hopes for nearer $64.5 billion.
Broker Morgan Stanley reiterated its ‘overweight’ rating post the results, noting that “with the AI innovation cycle just starting, we see plenty of runway for growth.”
ii view:
Started in 1975, Microsoft today employs over 220,000 people. 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 around a quarter. Geographically, sales are divided almost evenly between its home US market and overseas nations.
For investors, uncertainties regarding the economic outlook and geopolitical tensions are likely to keep spending budgets for its corporate customers guarded. Fellow tech titans such as Alphabet and Meta are not standing still, while Microsoft’s failed venture in mobile phone software has arguably left it void of the most important consumer computing device of all - the mobile phone, which is now dominated by Apple and Alphabet’s Android software.
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On the upside, cloud data sales, potentially hosting its customer’s own AI related software, remain robust. Although not wholly owned by it, Microsoft has a working relationship with ChatGPT along with its own Copilot software aiding its own office products. Its continued domination of corporate software via Windows and Office also gives it an ongoing foot in the door to sell other services such as cloud and security provision.
On balance, and while future AI related growth is far from guaranteed, Microsoft remains a technology powerhouse and a consensus analyst fair value estimate of $470 per share demonstrates optimism 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
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