ii view: Microsoft stock drops despite confidence in AI prospects

Shares fell by more than a quarter in 2022 but the company is one of the tech giants driving the spectacular stock market rally in 2023. Buy, sell, or hold?

Fourth-quarter results to 30 June

• Revenue up 8% to $56.2 billion year-over-year
• Net income up 20% to $20.1 billion
• Earnings Per Share (EPS) up 21% to $2.69
• Returned $9.7 billion to shareholders

ii round-up:

Windows software maker Microsoft Corp (NASDAQ:MSFT) detailed quarterly earnings which beat Wall Street hopes, although sales guidance was weaker than forecast as customers remain cautious on spending given the tough economic backdrop.  

Cloud data sales were up a fifth at $30.3 billion, helping drive earnings per share up by the same amount to $2.69, beating forecasts for $2.55 per share. Revenue for the current first quarter to the end of September are expected by management to come in at up to $54.8 billion, just shy of analyst forecasts for $55 billion. 

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Shares in the Dow Jones and Nasdaq 100 company fell 4% in post results US trading having come into this latest announcement up 46% year-to-date. That’s similar to both Apple Inc (NASDAQ:AAPL) and Netflix Inc (NASDAQ:NFLX), although ahead of a 40% gain for Google owner Alphabet Inc Class A (NASDAQ:GOOGL). The Dow Jones 30 itself is up by almost 7% in 2023 while the tech heavy Nasdaq 100 is up 42%. 

Accompanying management comments flagged Microsoft's ongoing focus on “leading the new Artificial Intelligence (AI) platform shift, helping customers use its Cloud (servers) to get the most value out of their digital spend, and driving operating leverage.”

The ChatGPT facility, launched in November 2022, uses Microsoft supercomputing infrastructure, powered by NVIDIA Corp (NASDAQ:NVDA) GPUs, that Microsoft built specifically for OpenAI. 

Microsoft only recently announced a $30 per month charge to business premium customers for its AI-enabled productivity suite to be provided alongside its 365 office software. It will enable users to create complex documents, summarise meetings, and organise emails.

Sales at its Personal Computing division fell 4% year-over-year, hindered by a one-fifth fall in device sales, although that was partly countered by a 5% increase in Xbox related demand. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares following the results, highlighting what it believes to be a ‘solid leadership position ahead of a large AI-driven tech cycle.’

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. 

For investors, the difficult economic backdrop including elevated costs for businesses generally now casts a shadow over potential spending plans for Microsoft's customers. The pandemic, which pushed and encouraged customer spending to enable staff to work from home, has now made for tough comparatives, while Microsoft’s failed venture into mobile phone software has arguably left it void of the most important consumer computing device of all, now dominated by Apple and Alphabet’s Android software.  

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On the upside, its Open AI-backed ChatGPT is already the most recognised AI facility, with the world of AI in the early foothills of growth. Microsoft’s ongoing domination of the corporate software sector leaves it as a potent force, with Windows 11 launched in late 2021. Its foot in the door also gives it access to corporations to sell other services such as cloud data storage, security requirements and now AI infrastructure.  

For now, and while valuing AI prospects is extremely difficult, this tech mammoth looks to remain deserving of its place in diversified 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