To The Moon

Yesterday, $NASDAQ(.IXIC)$ jumped 2.25% as investors indulged in the fantasy that the Fed will slow interest rate hikes. However, several giants released their earnings miss expectations after the bell. $Microsoft(MSFT)$ Q1 net profit plunged 14% $Alphabet(GOOG)$ net income plunged 26.5% $Texas Instruments(TXN)$ Q4 guidance less than expected The giants' earnings misses triggered sell-offs in tech stocks: Microsoft once plunged nearly 8% after the bell, Google once fell more than 7%. 1.Microsoft's earnings report really that bad? - Look at key numbers Revenue: $50.1 billion, exceeding expectations of $49.56 billion, an increase of 11% year-on-year, a growth rate of 16% at fixed exchange rates. Data from Microsoft's earnings report; compiled by Value_investing Considering the high base from the pandemic dividend last year and the macroeconomic downturn this year, Microsoft's revenue growth rate is not bad. Net income: Q1 declined 14% year-over-year on the book value However, in the same period last year, Microsoft had an intangible asset transfer that brought in a tax benefit of $3.3 billion. Removing this factor, Microsoft's Q1 net margin increased 2% year-over-year. With 11% revenue growth vs 2% adjusted net income growth, Microsoft's earnings report is still disappointing. However, this doesn't mean Microsoft operations is deteriorating, but rather impacted by macro headwinds, such as a stronger dollar and higher energy costs. 1) Strong dollar In FY2022, Microsoft's overseas revenue share reached 49.5%. Due to the strong dollar, revenues denominated in foreign currencies are greatly reduced. Excluding the impact of exchange rates, Microsoft's Q1 net income increased 10% year-on-year. 2) Energy costs Cloud services in recent years push Microsoft back to the top, but the data center consume huge power. Under the energy crisis, the rise in energy costs brought hundreds of millions of dollars of losses to Microsoft. Gross margin: 69% in the Q1, down from 69.9% in the same quarter last year. Excluding the impact of the accounting policy change, the gross margin dropped by 3 percentage points. Summary Microsoft's Q1 net income was not as bad as the media reported. The stock price plunge was due to the concern on the slowdown of Azure cloud computing growth. 2. Microsoft's Segments Business Performance 1) Azure growth slowed down In Q1, Azure and other cloud services grew at a rate of 35% and 42% at constant currency, 1 percentage point lower than expected. On the earnings call, management expects growth to continue to decline by 5 percentage points in the current quarter. Data from Microsoft's earnings report; compiled by Value_investing The growth of cloud services did decline a lot compared to the growth rate of 50% in previous quarters. However, considering the continued expansion of the revenue base, it will be difficult to maintain a growth rate of 50%. Of course, the macroeconomic downturn this year has also put a damper on enterprise demand for increased cloud services. 2) PC sales decline also dragged down the performance According to data released by Canalys, the global PC market suffered a sharp decline in demand in the third quarter of 2022, with total shipments of desktops and laptops falling 18 percent to 69.4 million. PC shipments fell 6.8% in the first quarter and 15% in the second quarter of this year. Taking inflation into account, the fourth quarter figures will continue to deteriorate. PC market directly dragged down Microsoft's Windows OEM business. Q1 revenue growth fell by 15%, the worst report ever, also eroded the demand for Windows software. Considering the cyclical nature of PC demand, the current moment is likely to be the worst moment. Looking ahead to the next quarterly report, management expects Data from Microsoft's earnings report; compiled by Value_investing overall revenue growth to remain a 5 percentage point drag from currency Intelligent Cloud growth expected to be in the range of 15.9%-17.6% Productivity & Business Processes growth in the range of 4.2%-6% Personal Computing decline of 14.7%-17%. Management expects to be able to achieve a 2-digit revenue growth rate in fiscal 2023 at constant exchange rates. In terms of guidance and cloud services revenue base, Microsoft's growth rate will be lower than previous years. Microsoft's current P/E is still 27x, which can explain the share prices plunge: Data from Microsoft's earnings report; compiled by Value_investing Bottom Line Microsoft Q1 was not bad but disappointing for investors. Exchange rates, inflation and the impact of the economic downturn may cause investors to worry. But the good news is that the pessimism factor has been reflected in the stock price. As the Fed rate hike enters the end, the bitter days of tech stocks may come to an end.