ii view: Microsoft cloud slowdown disappoints

Fourth-quarter results to 30 June

• Revenue up 15% to $64.7 billion year-over-year
• Net income up 10% to $22 billion
• Earnings Per Share (EPS) up 10% to $2.95
• Returned $8.4 billion to shareholders, unchanged from Q3

Chief Executive Satya Nadella said:

“Our strong performance this fiscal year speaks both to our innovation and to the trust customers continue to place in Microsoft." 

“As a platform company, we are focused on meeting the mission-critical needs of our customers across our at-scale platforms today, while also ensuring we lead the AI era.”

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ii round-up:

Tech titan Microsoft Corp (NASDAQ:MSFT) reported sales and earnings that beat Wall forecasts, but growth at its artificial intelligence (AI) driven cloud data division proving marginally disappointing. 

Fourth-quarter earnings improved 10% year-over-year to $2.95 per share, exceeding analyst estimates of $2.93. Sales at the closely watched Intelligent Cloud business climbed 19% to $28.5 billion, down from growth of 21% in the prior quarter and below Wall Street hopes for$28.7 billion. 

Shares in the Dow Jones and Nasdaq 100 company dipped 3% in after-hours US trading having come into this latest news up 12% year-to-date. That’s below a near 22% gain for fellow cloud data server provider Alphabet Inc Class A (NASDAQ:GOOGL),but broadly in line with the 14% gain for the S&P 500 index in 2024.

Overall Microsoft revenue for the three months to late June rose 15% to $64.7 billion, surpassing analyst estimates of $64.4 billion. Personal Computing sales jumped 14% higher to $15.9 billion, with Xbox content and services sales up 61%, aided by its previous Activision acquisition. That beat divisional forecasts of $15.49 billion.

Sales at its Productivity and Business Processes division climbed 11% to $20.3 billion, helped by a 10% increase in revenues for Linked-In. Analysts had forecast divisional sales of $20.1 billion. 

Full-year revenue climbed 16% to $245.1 billion, pushing earnings per share up 20% to $11.80 per share. 

Capital expenditure during the quarter totalled $19 billion. Like Facebook owner Meta Platforms Inc Class A (NASDAQ:META) and Google owner Alphabet, Microsoft continues to invest in product to enable and enhance AI facilities going forward including NVIDIA Corp (NASDAQ:NVDA) chips for datacentres. 

Broker Morgan Stanley reiterated its ‘overweight’ rating post the results. First-quarter results are likely to be announced late October. 

ii view:

Started in 1975, Microsoft regularly competes with iPhone maker Apple Inc (NASDAQ:AAPL) and computer chip maker Nvidia for title of America's largest company by stock market value. Its corporate focused Intelligent Cloud business generates its biggest slug of sales at close to a half, followed by Productivity and Business Processes at almost 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, competition to host AI software on its datacentre serves for customers such as banks is intense, with Alphabet, Amazon.com Inc (NASDAQ:AMZN) and its AWS division and even International Business Machines Corp (NYSE:IBM) all competing hard. Heightened global geopolitical tensions raises the potential for government sponsored cyberattacks from the likes of Russia, disrupting operations. Costs for businesses generally remain elevated, while Microsoft’s failed previous venture in mobile phone software has arguably left it void of the most important consumer computing device of all, the mobile phone, now dominated by Apple and Alphabet’s Android software.    

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More favourably, Microsoft’s continued domination of corporate software via Windows and Office gives it an ongoing foot in the door to sell other services such as cloud and security provision. For AI, although not wholly owned by it, Microsoft does have a working relationship with ChatGPT along with its own Copilot software providing its own customer offering, while ongoing investment in datacentres is still fuelling cloud service revenue growth.  

For now, and while future AI aided growth is far from certain, there's certainly exciting potential, and a consensus analyst estimate of fair value near $500 per share should offer grounds for ongoing longer-term optimism.  

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