ii view: Microsoft beats profit forecast but outlook cloudy

This iconic tech titan has fallen in value by more than a tenth over the last year. We assess prospects. 

Second-quarter results to 31 December

• Revenue up 2% to $52.7 billion year-over-year
• Net income down 7% to $17.4 billion
• Earnings Per Share (EPS) down 6% to $2.32
• Returned $9.7 billion to shareholders, down 11% 

Chief executive Satya Nadella said:

“The next major wave of computing is being born, as the Microsoft Cloud turns the world’s most advanced AI models into a new computing platform. We are committed to helping our customers use our platforms and tools to do more with less today and innovate for the future in the new era of AI.”

ii round-up:

Windows software maker Microsoft Corp (NASDAQ:MSFT) reported quarterly earnings which beat Wall Street hopes, but sales guidance was weaker than forecast as customers reined in spend amid fears of a recession. 

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Adjusted quarterly earnings of $2.32 per share exceeded analyst estimates of nearer $2.30, with overall sales up 2% year-over-year to $52.75 billion, its slowest rate in over five years. Accompanying sales guidance for the current third quarter of between $50.5 billion and $51.5 billion fell short of analyst forecasts of $52.5 billion, and comes in the wake of 10,000 job cuts.  

Microsoft shares drifted marginally lower in aftermarket US trading having come into this latest announcement down by around 16% over the last year, similar to the Nasdaq Composite tech index. Shares in Google owner Alphabet Inc Class A (NASDAQ:GOOGL), which also recently announced 12,000 job cuts, are down by around a fifth over that time, while Facebook owner Meta Platforms Inc Class A (NASDAQ:META) has more than halved. 

Sales for Microsoft’s Personal Computing division fell by almost a fifth to $14.2 billion, hindered by a broad reining in of spending, with device sales down by 39% and revenues for its Xbox content and services down 12%. 

Sales for its closely watched Intelligent Cloud division rose by 18% to $21.5 billion, broadly matching Wall Street forecasts, although that was down from growth of 20% in the prior first quarter. Accompanying management comments warned of a slowdown in demand during December, with the slower pace of demand expected to continue through the third quarter. 

Revenues for its Productivity and Business Processes division, and including its Linked-In business, grew 7% to $17 billion, down from growth of 9% in the previous quarter. 

Overall returns to shareholders including both share buybacks and dividends during period came in at $9.7 billion, down 11% over the same period last year. 

Broker Morgan Stanley, reiterated its ‘overweight’ stance on the shares, flagging expected easier comparatives moving away from the pandemic, product price increases and easing currency headwinds as likely assisting future earnings. 

ii view:

Headquartered in Redmond, Washington, sales are split almost evenly between its home US market and overseas. 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. 

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For investors, the challenging economic backdrop, including rising interest rates, overshadows potential spending plans for its customers. The pandemic arguably caused an over hiring of staff across the tech industry and is making for tough comparatives, while Microsoft’s failed previous venture into mobile phone software has arguably left it void of the most important consumer computing device of all, now dominated by both Apple Inc (NASDAQ:AAPL) and Google. 

More favourably, its ongoing domination of the corporate software industry leaves Microsoft as a potent force, with Windows 11 launched in October 2021. Its foot in the door also gives it access to corporations to sell other services such as cloud data storage and security requirements. Security related sales rose by a third in 2022 from 2021 to over $20 billion. 

On balance, and with the consensus analyst estimate of fair value per share sat at over $290 per share, this tech mammoth still looks to be worthy of consideration. 

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