After Earnings: Remaining Bullish on Microsoft
After Tuesday's market close, $Microsoft(MSFT)$ reported results for its fiscal 2023 fourth quarter and full year ended June 30.
Highlights that beat market expectations:
Q4 revenue grew 8% year-over-year to $51.9 billion, ahead of market forecasts of $54.9 billion, but slower than 12% growth in the prior year quarter.
Operating income rose 18% to $24.3 billion, net income grew 20% to $20.1 billion, and diluted EPS increased 21% to $2.69, exceeding estimates of $2.56.
Microsoft Cloud revenue was $30.3 billion, up 21% year-over-year or 23% in constant currency, slightly above the $30.05 billion expected.
Key points to note:
Full year revenue of $211.9 billion increased 7% annually, marking a significant slowdown from over 10% growth in each of the past 5 years. The deceleration is mainly attributed to slower expansion in cloud services.
Growth in the cloud segment, excluding currency impact, was 27% for Azure - below the 31% last quarter. Management guided to a further moderation to 25-26% next quarter. With Azure representing over half of total cloud revenue, its slowing momentum will affect future growth of the overall cloud business. However, management remains optimistic about long-term market opportunities, expecting growth rates to revert to historical levels.
Capital expenditures of $8.94 billion exceeded estimates of $7.85 billion and were elevated versus historical levels. On the earnings call, management reiterated plans to further expand capex in fiscal 2024 to meet infrastructure demand from robust growth in cloud services and AI applications.
In summary, Microsoft's Q4 results edged past expectations but were largely uneventful, with the stock selling off over 4% after-hours on slowing cloud growth and AI revenue yet to accelerate meaningfully.
Regarding Microsoft's AI efforts, management noted on the call that monetization in AI is a gradual, incremental process.
Is Microsoft expensive now? While current valuation exceeds reasonable expectations, tech multiples are stretched across the board, so Microsoft is not an outlier.
Microsoft holds a prime competitive position in core AI competencies - with deep integration across hardware, algorithms, cloud platform, and applications through its partnership with OpenAI. Its unparalleled resources and capital give Microsoft unique advantages.
Azure continues gaining share in cloud computing and will be critical infrastructure underpinning future AI applications. The cloud enables realization of AI value.
Microsoft boasts a powerful product matrix, with AI integration across major offerings. Demand is surging for these services based on OpenAI models. While Copilot isn't ready for full release yet, Microsoft's AI capabilities are leading the market.
Earlier, Microsoft announced Office 365 Copilot pricing at an additional $30 per user monthly. Though still months from launch, this validates Microsoft's AI monetization potential, driving a 6% intraday spike.
In the battle for large language models, Microsoft is poised to commercialize AI the fastest. The competitive landscape will likely remain dominated by Microsoft, Apple, and Google. Microsoft appears best-positioned currently to reach a $10 trillion valuation first.
In the battle of large language models, Microsoft is the company that can integrate AI and apply it to practical use the fastest. In the future competitive landscape, it is highly likely that the dominance of the three giants - Microsoft, Apple, and Google - will continue. If we only consider the current strength, there is no doubt that Microsoft is the one capable of taking the top position.
One question: Which company do you think will be the first to reach a market capitalization of 10 trillion US dollars?
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