To The Moon

A Tale of 2 Cities

Both $Microsoft(MSFT)$  and $Alphabet(GOOG)$ are due to kick start releases of latest quarterly earnings by the big techs when they post their first-quarter earnings results tomorrow, 25 April. Their performances will set the stage for the all-important reviews of the impact of the relentless interest rate hikes to rein in a stubbornly high inflation and that of the rising geopolitical tensions that have threatened global free trades on the technology sectors. In fact, the 2 companies have so far-reaching influences that they are also bellwethers of the overall US economy that is facing a looming recession.

The 2 companies have been in the news lately over their race to launch artificial intelligence in their web browsers and search engines. While significant trailing behind Alphabet’s Google, Microsoft’s Edge web browser and Bing search engine have since made leaps and bounds with Microsoft’s integration of AI technology into its software and services, threatening the leadership and dominance of Google. Though it is still early days to determine who will emerge to be the eventual winner in the race, Microsoft looks promising to grab market share of the online advertising revenue from Google in the internet search market, and its share price has risen at the expense of Alphabet’s pullback.

The King is not Resting on his Laurels

While Microsoft Windows continues to dominate personal computer operating systems and remains its cash cow, the software giant has since expanded into other productivity and server software as well as video games and hardware to diversify from its reliance on operating systems for earnings.

In fact, Microsoft has so successfully pivoted from personal computing software to cloud computing services that the 23% market share by its Azure cloud platform solutions falls behind only $Amazon.com(AMZN)$  Amazon Web Services 32% in the market for cloud infrastructure services, while Google Cloud which jumped onto the cloud computing bandwagon late is a more distant third in position with 11% market share.

Cloud computing is promising to become the revenue driver for Microsoft as it appeals to corporate users looking to automate their operations and digitise their businesses by offering a complete solution for cloud computing by complementing it with a suite of enterprise productivity solutions such as Microsoft Teams, Office 365 and Dynamics 365. These efforts are starting to bear fruits as Microsoft Azure chips away market share from Amazon Web Services.

I’m particularly excited about Microsoft’s investments in artificial intelligence as it is poised to fuel the next phase of growth in the internet space. Since its first investment in OpenAI in 2021, Microsoft has followed up with subsequent tranches with the latest $10 billion announced in January this year, as Microsoft accelerates its efforts to infuse artificial intelligence into all its software and services. Last month, Microsoft announced that it is adding artificial intelligence tools to its popular Office productivity applications and cybersecurity offerings. The company is also introducing Microsoft 365 Copilot which will employ next-generation artificial intelligence to automate tasks and offer suggestions, and it has launched Microsoft Security Copilot, a new tool for enterprises to promptly detect and respond to cyber threats.

Metaverse Ambition Stalled

However, Microsoft’s planned acquisition of Activision Blizzard for $68.7 billion in cash to broaden its gaming empire and accelerate its expansion into the metaverse space appears to have hit roadblocks, it is faces regulatory challenges from antitrust concerns both in US and Europe.

While Microsoft is still fighting the lawsuit with the Federal Trade Commission and the jury is still out, its metaverse ambition has been somewhat dented in the meantime.

Mixed bag of fundamentals

Since achieving a record height of around $350 in November 2021, Microsoft stock had gone on a steady decline through last year before picking up 19% year to date to $286. However, that is still a far cry from its past glory.

Early this year, Microsoft had reported mixed results for the quarter ending last December and offered disappointing outlook. Microsoft earned an adjusted $2.32 per share on revenue of $52.7 billion in that quarter, with earnings slipped 6% even though sales rose 2% on a year-over-year basis. For the last quarter ending in March, Microsoft has previously forecast sales of $50.5 billion to $51.5 billion, versus a sales of $49.4 billion in the same quarter last year.

Despite rising interest rates that have stalled investments by many companies and shelved their expansion plans, this has not put the brakes on Microsoft’s ventures as the cash-rich software giants continues to generate ample ammunitions for its huge war chest from its cash cow operations, so that it does not have to depend on external financing to fund its investments.

All eyes will be on Microsoft’s earnings when it announces its results tomorrow, as the world looks for signs of exhaustion from the slowing economy and whether the company will be able to blow market expectations away.

Holding Forever

As for me, I’ll continue to be a long-term shareholder of Microsoft, as I believe that the holding period for a great business is forever. I’m confident that Microsoft will continue to thrive and grow from strength to strength as artificial intelligence drives its next phase of growth.

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