To The Moon

AI illusion shattered, Microsoft may face devaluation risk! After the closing of the U.S. stock market yesterday, both Google and Microsoft released their financial reports. The two tech giants are deeply engaged in the AI race, with Microsoft's OpenAI surpassing Google. However, following the financial report releases, Google surged by 5.76%, while Microsoft experienced a significant decline of 3.7%! Behind the dramatic contrast lies the shattering of AI's illusion. For Microsoft, the market expects OpenAI to drive revenue growth, while conversely, the market is concerned about Google's core business being eroded by Microsoft. However, the reality is that Microsoft has not experienced significant growth with the help of AI, and Google's core business has not been affected either. The market's overly high expectations for AI have ultimately proven to be misplaced. In addition to the disillusionment of AI fantasies, Microsoft's financial report also contains hidden concerns despite surpassing expectations in revenue and net profit across the board: In Q4, the revenue reached $56.189 billion, with a year-on-year growth of 8.3%, exceeding analysts' consensus expectation of $55.494 billion and also surpassing the management's guidance range of $54.85 billion to $55.85 billion: Breaking down the business segments, the revenue from the Intelligent Cloud division reached $23.99 billion, with a year-on-year growth rate of 14.7%, surpassing the upper guidance of $23.9 billion provided by the company; The revenue from the Productivity and Business Processes division amounted to $18.291 billion, with a year-on-year growth rate of 10.2%, exceeding the upper guidance of $18.2 billion provided by the company; The revenue from the Personal Computing segment was $13.9 billion, showing a decline of 3.1% year-on-year. The decline was significantly narrower compared to the 8.7% decrease in the previous quarter, and it clearly exceeded the upper guidance of $13.7 billion provided by the company: Breaking down by product, in Q4, there was a notable slowdown in growth for LinkedIn and Windows Commercial products and cloud services. Azure and other cloud services experienced a growth rate of 26%. The growth rate for Xbox content and services improved. However, the revenue from Windows OEM business declined by 12% year-on-year, showing a significant improvement from the 28% decline in the previous quarter: In terms of profitability, Microsoft's Q4 gross margin reached 70.1%, rebounding to a historical high: At the same time, Microsoft strengthened cost control measures. For example, in Q4, marketing expenses were $6.2 billion, showing a year-on-year decrease of 1.6%; research and development expenses were $6.7 billion, also down by 1.6% compared to the previous year; administrative expenses were $2.2 billion, representing a significant increase of 25.6%, but due to the smaller amount, Microsoft's overall expense ratio in Q4 decreased by 1.4 percentage points. As a result, Microsoft achieved a net profit of $20.08 billion in Q4, showing a significant increase of 20% year-on-year, far surpassing the revenue growth rate of 8.3%. While the Q4 financial report initially appears to have exceeded expectations, a closer examination reveals that Microsoft's growth rebound was mainly attributed to the peak of the U.S. dollar appreciation. At fixed exchange rates, the Q4 revenue growth rate was 10%, remaining flat compared to the previous quarter. The most crucial aspect is that the revenue growth rate for Azure and other cloud services, at fixed exchange rates, was 27%, which shows a significant slowdown compared to the previous quarter's growth rate of 31%! Furthermore, according to Microsoft's guidance for the first quarter of the fiscal year 2024, the revenue growth rate for Azure and other cloud services, calculated at fixed exchange rates, is expected to increase by 25% to 26%, continuing the trend of slowdown. From the perspective of commercial remaining performance obligations, Q4 amounted to $224 billion, showing a year-on-year growth rate of 18.5%, which indicates a significant deceleration compared to the previous growth rate of over 26%: Furthermore, the value of newly signed contracts for the quarter showed a year-on-year decline of 2%, a significant slowdown from the 11% growth rate in the previous quarter. It is evident that enterprise IT spending is still on a downward trend! The hope that AI would assist in the rebound of cloud business growth remains unfulfilled in the next quarter's financial report. Under such disappointment, Microsoft's price-to-earnings ratio still remains at historical highs, potentially facing the risk of valuation downgrade: $Microsoft(MSFT)$ $Alphabet(GOOG)$ $C3.ai, Inc.(AI)$