ii view: Microsoft’s outlook proves more clouded

26th October 2022 14:30

by Keith Bowman from interactive investor

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Shares for this global tech giant have fallen by more than a fifth year-to-date. Buy, sell, or hold?

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First-quarter results to 30 September

  • Revenue up 11% to $50.1 billion year-over-year
  • Net income down 14% to $17.6 billion
  • Earnings Per Share (EPS) down 13% to $2.35
  • Returned $9.7 billion to shareholders, down 11% 

Chief executive Satya Nadella said:

“In a world facing increasing headwinds, digital technology is the ultimate tailwind. In this environment, we’re focused on helping our customers do more with less, while investing in secular growth areas and managing our cost structure in a disciplined way.

ii round-up:

Windows software-maker Microsoft (NASDAQ:MSFT) detailed quarterly earnings and sales that beat Wall Street hopes, but offered disappointing outlook forecasts as the slowdown in economic growth appears set to hinder it. 

First-quarter earnings per share of $2.35 per share exceeded analyst expectations nearer to $2.30, but contrasted with management’s next-quarter sales forecast of between $52.35 and $53.35 billion, and below market estimates nearer to $56 billion. 

Microsoft shares fell by more than 5% in aftermarket trading having come into this latest news down by around a quarter year-to-date. Shares for rival cloud data business operators Alphabet Inc (NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN) are down by similar amounts during 2022, as is the tech-heavy Nasdaq Composite index.

Sales growth for Microsoft’s Azure cloud data business slowed to 35% in the period, down from 40% in the prior fourth quarter. Management also flagged an expected further slowing in the next quarter.

In July, the Dow Jones constituent company announced that it was slowing its pace of hiring new employees given current economic conditions and in line with rival tech firms.

Sales for its Personal Computing business fell slightly year-over-year to $13.3 billion, although rose by 3% when adjusting for currency movements given the strong dollar. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares following the results. 

ii view:

Started in 1975, Microsoft today employs more than 200,000 people. Headquartered in Redmond, Washington, its Cloud business accounts for the biggest slice of sales at close to two-fifths, followed by Productivity and Business Processes at close to a third, with Personal Computing providing the balance. Geographically, sales are split roughly half between the home US market and overseas. 

For investors, a highly uncertain economic outlook, including rising interest rates, now overshadows potential spending plans for its customers. Microsoft’s failed previous venture in mobile phone software has arguably left it devoid of the most important consumer computing device of all, the mobile phone. Both Apple (NASDAQ:AAPL) and Alphabet now dominant, while the debate over appropriate tech valuations is never far away. 

On the upside, continued domination of the corporate software arena leaves Microsoft as a potent force. It previously launched Windows 11. It also gives Microsoft access to corporations to sell its other services, such as cloud data storage and security requirements. In 2021, it committed to spending $20 billion on cybersecurity over the next five years. 

In all, and with the consensus analyst estimate of fair value per share sat at over $300 per share, this technology mammoth still looks to be one to own for the long term. 

Positives: 

  • Windows operating system holds a dominant market position
  • Growing cloud business

Negatives:

  • Uncertain economic outlook
  • Political concern regarding the size and power of technology companies remains

The average rating of stock market analysts:

Strong buy

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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