Microsoft Offers Lackluster Guidance, Says New Business Growth Slowed In December – Microsoft earnings (NASDAQ:MSFT) require a legitimate bull/bear argument. Even critics agree that MSFT has the right to be a standalone and reliable long-term investment in Microsoft Office and Microsoft 365.
This part of the company is connected to Azure, the future engine of growth. Add to that the potential for strong growth from AI, marketing and gaming, and you’ll understand why bulls love MSFT.
Microsoft Offers Lackluster Guidance, Says New Business Growth Slowed In December
The bear argument is mostly about company size. The Law of Big Numbers requires aggressive growth to keep the P/E 20% higher than the S&P 500.
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Moreover, the lesson we will learn from the bear market is that even the best companies can be worn. This claim is evidenced by the losses suffered by FAANMG last year.
Microsoft’s stock hit its third-worst performance since the company went public in 1986, and 2022 was the first year MSFT failed to top the S&P 500 since 2012.
However, the growth potential lies in Microsoft’s cloud software, LinkedIn and games. But with a market capitalization of $1.8 trillion, can they make investments that support the P/E associated with growth stocks? And with a possible recession will stocks go down?
MSFT Q1 2023 Earnings beat ups and downs. EPS of $2.35 and revenue of $50.1 billion beat forecasts of $2.31 per share and $49.78 billion in sales.
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Azure and other cloud services saw annual growth of 20% and brought in $20.3 billion. Business products, including office and consumer products and cloud services, saw revenue increase 9% year-on-year to $16.5 billion.
These were excellent plus points. Unfortunately, there were also a few things to consider.
Your personal computer revenue “slightly down” to $13.3 billion. While smart cloud showed strong growth, this was a significant drop from a comparable 31% increase.
At the conference, Chief Financial Officer Hood predicted two years of growth in FY23, while warning of the weakness of the PC market.
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There is no doubt that the cloud will provide strong growth for the foreseeable future. Grandview Research predicts a CAGR of 15.7% for the global cloud computing market by 2030, and Fortune Business Insights predicts that the cloud computing market will record a CAGR of 19.9% by 2029.
MSFT is very sensitive to the current situation. The chart below shows the decline in investments in Azure and other clouds over the last five quarters.
Microsoft recently revealed plans to expand Azure by building data centers in eleven new regions, and there’s reason to believe the company can continue to grow through the cloud.
Additionally, Morgan Stanley analyst Keith Weiss believes that MSFT has an internal competition track for IT investments. Weiss cites a CIO study that shows that Microsoft will get 40% of the expected profits from using the IT portfolio, compared to 24% for Amazon. Nearly half of CIOs surveyed expect MSFT to take over the lion’s share of IT budgets over the next three years.
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Early last year, Microsoft announced plans to buy Activision Blizzard (ATVI) for a total of $68.7 billion. If the deal goes through, it will be the largest Microsoft acquisition in history.
The addition of Activision will only increase revenue from updates and will add flagship titles such as Call of Duty, World of Warcraft, Overwatch, Diablo and Candy Crush to Microsoft’s games. It also pushes Microsoft to third place among game developers worldwide.
Last month, the U.S. Federal Trade Commission (FTC) announced that it wanted to restrict Activision Blizzard’s presence. This does not mean the death of the company; however, MSFT and FTC will meet in court to face off in front of a judge.
Consider me skeptical about the ability of the FTC to block this transaction. Microsoft has 35% of the global market and Sony (SONY) close to 65%. In addition, Xbox had a market share of 16% in 2021, while Microsoft video had a market share of 10%.
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Unfortunately, the deal with Activision is not the only problem facing the gaming community. The chart below gives investors a picture of the game Microsoft’s growth is in.
Outside of cloud-based companies, gaming has been a major driver of growth. The chart below shows the growth history of Microsoft’s gaming industry over the last nine years.
I understand that FY2022 was about dramatic growth; however, a company like MSFT, with a market capitalization of $1.8 trillion, usually needs strong growth to keep its stock value high.
According to research by Technavio, the gaming market is expected to record a CAGR of 12% between 2021-2025. This estimate is in line with the Acumen Research and Consulting report, which predicts a CAGR of 10.2% for the gaming industry. 2022 to 2030.
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When thinking about digital marketing, Alphabet and Facebook (META) come to mind. However, MSFT earns $10 billion through advertising through Bing, the Xandr platform, and LinkedIn ads.
With over 875 million professionals and 61 million businesses using the service, LinkedIn saw revenue of 8% in the last quarter and grew 21%.
Precence Research forecasts a CAGR of 9.22% for the global digital marketing market in 2022-2030.
But advertisers are quickly cutting budgets as the recession approaches. It wouldn’t be a surprise if ad revenue fell in the short term.
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When it comes to marketing, there has been a lot of talk lately about ChatGPT, a smart chatbot developed by OpenAI. He answers readers’ questions orally, can write and debug computer programs, compose music, these are just some of his skills.
The founder of the company said that within a few days of its launch, the text was used by more than a million users. This has led to discussions among investors about how ChatGPT could be used by Bing to challenge Google.
I was wary of ChatGPT, but for the sake of brevity I will refer to the following quote to summarize my thoughts.
Microsoft invested $1 billion in OpenAI in 2019, and there have been reports that the company is considering investing another $10 billion in OpenAI. ChatGPT is very small, but good enough to give some things a false impression of size. It is a mistake to rely on everything that is important now. It is progress personified; we have a long way to go in terms of strength and integrity. Fun inspires creativity; Excellent! based on facts; not such a good idea. We will try to fix it! Altman, CEO of OpenAI
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ChatGPT may have potential, but may not support Microsoft’s growth in a positive way in the future.
Microsoft is one of only two publicly traded companies with an AAA credit rating from Standard & Poor’s.
The current rate of return is 1.14%, the payout rate is 27.37%, and the 5-year interest rate is 9.82%.
MSFT trades at $239.23 per share. The average annual cost for 33 MSFT assessors is $293.09. The average price estimated by the 23 analysts who calculated third-quarter earnings is $281.65.
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The forward P/E of the stock is 25.10x, below the 5-year average P/E of 30.77x. The 5-year PEG is 2.10x, slightly below the 5-year average ratio of 2.17x.
Microsoft is not immune to serious financial problems. This is reflected in the results of the deficit in the third quarter. While Azure experienced strong growth, it was slower than its predecessor.
With strong growth in the gaming industry slowing down, PC sales declining and a recession looming, the digital advertising market is shrinking.
This should be compared with the company’s results for 2022. Microsoft reported revenue of $198.3 billion, up 18%, and operating income of $83 billion, up 19%. In addition, Microsoft boasts over 30% margins, and Azure is an almost guaranteed double-digit growth in the future.
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Unfortunately, growth isn’t an issue when considering Microsoft as a potential investment: it’s more about the amount of sustainable growth that needs to be achieved to support the $1.8 trillion company’s high valuation.
Investors should note that following a decline in the value of MSFT shares in the early 2000s, the recovery continued until 2015.
I started a very small project at the company and did what I could about it (I sold all my FAANMG shares early last year).
Climbing the cloud, gaming and marketing are key to MSFT’s long-term, solid growth. A continuation of the deal with Activision, while not essential, would be a solid combination.
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I would say that the next two years will be very difficult, because then we had, you know, a big acceleration during the epidemic and there is a lot of demand. There is a real recession in many parts of the world. And hence the argument