Source: Beast Finance Author: Beast Finance
For the past decade, Microsoft (MSFT) has dominated the PC operating system market. In recent years, the company has successfully unlocked new business models, namely, further driving rapid revenue growth through its fast-growing office productivity and cloud solutions.
According to data from Prosperspark, 95% of Fortune 500 companies are using Microsoft Azure, and more than 70% of Fortune 500 companies have Microsoft 365 licenses.
Microsoft's strong track record in terms of financial performance also gives us strong belief that Microsoft will continue to benefit from long-term market trends of more digitization and increased enterprise demand for cloud solutions.
Microsoft's current valuation also suggests that the stock is currently slightly overvalued, which means that Microsoft stock is a good long-term investment, especially if the stock price is temporarily down. Beast Finance predicts that Microsoft's stock price will fall after the release of the financial report for the third quarter of fiscal year 2023.
The main business of Microsoft Microsoft
is a global technology company and the largest independent software developer in the world. The company's origins can be traced back to the Windows operating system and Office software that are widely used today. Over the years, Microsoft has expanded into many other products, including enterprise software such as Windows Server, SQL Server, Dynamics CRM, SharePoint, Azure and Lync. In addition, Microsoft also produces hardware, including Xbox game consoles and Surface tablet computers.
At present, Microsoft's revenue mainly comes from three businesses, namely cloud business, productivity and business process business and personal computer business.
In the last quarter, the Productivity and Business Processes business generated $17.002 billion in revenue, accounting for 32% of the company's total revenue. This part of the business mainly includes a series of products and services to help enterprises improve productivity, such as Office 365, Exchange, SharePoint and Dynamics business solutions. The revenue of the intelligent cloud business was 21.508 billion US dollars, accounting for 41% of Microsoft's total revenue. This part of the business mainly includes Microsoft's public, private and hybrid server products and cloud services, including Azure, SQL server and enterprise services. The PC business generated $14.237 billion in revenue, or 27% of Microsoft's total revenue. This segment includes Windows, Surface devices, gaming devices (Xbox), search and advertising, and more.
Microsoft's operating income is also broken down into three segments, which are also similar to its revenue, with the Productivity and Business Processes business generating $8.175 billion in operating income, or 40% of the company's total operating income. The Intelligent Cloud business generated operating income of $8.904 billion, accounting for 44% of Microsoft's total operating income. The PC business generated $3.320 billion in operating income, accounting for 16% of Microsoft's total operating income.
Overall, Microsoft's operating margins for the second quarter of fiscal 2023 are: Productivity and Business Processes: 48%, Intelligent Cloud: 41%, and PCs: 23%.
Microsoft's financial situation
By inquiring Microsoft's financial data for the past ten years, Boldbeast Finance found that Microsoft's revenue has been growing steadily (revenue has grown from $77.8 billion in fiscal year 2013 to $198.3 billion in fiscal year 2022).
Looking at profitability, Microsoft's gross profit has also grown steadily over the past decade (gross profit reached $135.6 billion in fiscal 2022). However, its gross profit margin fluctuates greatly (the gross profit margin from fiscal year 2016 to fiscal year 2021 is between 64.0% and 68.9%). Operating margins have also grown over the past decade, from 29.8% in FY 2016 to 42.1% in FY 2022. In terms of free cash flow, Microsoft's free cash flow has also been growing steadily over the past decade, from $19.7 billion in fiscal year 2013 to $49.5 billion in fiscal year 2022. Free cash flow margins are also stable, (free cash flow margins range from 15.2% to 27.4% from FY2016 to FY2022).
Microsoft's balance sheet is also very healthy, with a current cash balance of $99.5 billion and net debt of $21.51 billion. More cash than debt, Microsoft's financial situation is very good. The total debt-to-equity ratio is only 42.58%, indicating that Microsoft is not over-leveraged. Additionally, Microsoft's current and quick ratios are 1.93 and 1.66, respectively, indicating that the company has ample liquidity to service its short-term debt.
Overall, from a long-term perspective, Microsoft's financials over the past decade and last quarter show the company's ability to pay down its debt and make strategic investments for long-term growth.
Microsoft’s EPS of $2.32 for the second quarter of fiscal 2023 beat consensus estimates by $0.01. However, actual revenue ($52.55 billion) for the second quarter of fiscal 2023 was $404.9 million lower than analysts had expected.
Microsoft's financial performance report for the second quarter of fiscal year 2023 shows that compared with the same period last year, Microsoft's revenue in the second quarter of fiscal year 2023 increased by $1 billion, an increase of 2%. Growth was primarily driven by growth in the Intelligent Cloud and Productivity & Business Process businesses. Revenues from the PC business, however, declined and reduced operating income by $1.8 billion, or 8%.
Forecasting Microsoft's financial report for the third quarter of fiscal year 2023
In the past 90 days, Wall Street analysts have lowered Microsoft's financial forecast for the third quarter of fiscal year 2023 29 times.
Beast Finance believes that there must be a reason why analysts lower Microsoft's financial forecasts so frequently. For example, two weeks ago, the International Monetary Fund released a report on the global economic outlook, which pointed out that the global economy is entering the weakest growth period since 1990. The IMF also slightly lowered its short-term forecast for global economic growth, predicting that the global economy will expand by 2.8% this year.
In addition, according to the World Economic Forum in Davos, businesses will also face multiple headwinds in the short term, with geopolitical tensions, weak demand and tight credit re-influencing the global economy. And all of these macro headwinds will have an impact on Microsoft, but the impact on Microsoft has both advantages and disadvantages.
On the downside: For example, global demand for durable goods, especially PCs, will drop significantly amidst macroeconomic weakness, which will hit revenues in Microsoft's PC business, which has been a big hit for decades. Microsoft's most profitable business.
On the bright side: With all the mass layoffs and other cost-cutting measures going on across the board, Microsoft's productivity and business processes business could benefit Due to the growing digital trend and macroeconomic weakness, it will even achieve faster than expected growth.
Although layoffs are a measure of cost optimization for enterprises, after layoffs, the remaining work must be done, which may lead to accelerated adoption of artificial intelligence and other digital products by enterprises, and Microsoft is currently a leader in the field of artificial intelligence , which is where macroeconomic weakness benefits Microsoft.
But Beast Finance believes that the benefits brought by the concept of artificial intelligence have been reflected in Microsoft's stock price (so far this year, Microsoft's stock price has risen by 20%).
Therefore, we believe that Microsoft's fiscal third quarter 2023 earnings report is likely to trigger a mild sell-off and lead to a decline in Microsoft's stock price, which will provide better buying opportunities for long-term investors.
To be specific, the market generally expects that Microsoft's revenue in the third quarter of fiscal year 2023 will reach US$51.04 billion, a year-on-year increase of 3.4%. But we think that number may be a bit overestimated.
The first reason is that Microsoft's personal computer business revenue has fallen by nearly one-third year-on-year. One could argue that Microsoft's cloud business is currently growing at double-digit rates, which would certainly offset the decline in the PC business.
But Amazon's (AMZN) CEO Andy Jassy's recent letter to shareholders shows that Amazon's cloud business AWS is currently experiencing short-term headwinds, as companies have become more cautious in their spending amid a challenging macroeconomic environment. .
The second reason why we believe that Microsoft's revenue in the third quarter of fiscal year 2023 is overestimated by the market is that a recent Citigroup and Goldman Sachs survey of large companies in terms of IT spending shows that most companies in 2023 Budgets are under pressure on the IT side, and we think that's a big problem.
In terms of earnings per share, the current market consensus is that Microsoft's earnings per share in the third quarter of fiscal 2023 will be flat compared to the same period last year. And we believe that Microsoft's earnings per share in the third quarter of fiscal year 2023 is also overestimated by the market. The reason is as follows:
Although Microsoft announced the layoff of 10,000 people in early 2023 (layoff means paying severance pay), Microsoft CEO Satya Nadella gave a severance pay "higher than the market level" .
Beast Finance believes that these severance payments are likely to be recorded in Microsoft's financial statements for the third quarter of fiscal year 2023. The likelihood of beneficial effects is extremely remote.
Risks
(1) During an economic downturn, one of the main risks facing Microsoft is a drop in demand for its products and services. During an economic downturn, consumers and businesses may have less disposable income, which could lead to lower spending on discretionary goods and services such as technology products. However, due to its market dominance, Microsoft still has strong pricing power. As a result, the company can maintain its price advantage even in a downturn because customers are willing to pay a premium for its products and services.
(2) The rapid development of technology may also bring risks to Microsoft. First, the company operates in a highly competitive industry with new technologies and innovations emerging one after another. If Microsoft cannot keep up with the latest trends and developments, then it may lose market share. Second, the rapid development of technology may make Microsoft's existing products and technologies quickly obsolete.
Conclusion
Microsoft is a great long-term investment because it meets the investment needs of investors looking for a company with strong financial performance, market dominance, and the ability to capture cloud solutions and artificial intelligence technologies.
But be careful with the upcoming earnings report, as it could send Microsoft's stock price down.