Source: Beast Finance Author: Beast Finance
Key Indicators of Microsoft Stock
Bold Beast Finance believes that Microsoft’s financial performance for the third quarter of fiscal year 2023 has three key indicators worthy of investors’ attention.
The first key metric is interest income. Microsoft's interest income has now grown 44% year-over-year, from $519 million in Q3 FY2022 to $748 million in Q3 FY2023, driven by its strong financial position (as of March 2023). 31, Microsoft had $104 billion in cash and short-term investments). The larger-than-expected increase in interest income is the key factor driving Microsoft's third-quarter fiscal 2023 earnings to exceed 10%. Looking ahead, Microsoft stated at the financial report meeting for the third quarter of fiscal year 2023 at the end of April that "interest income is expected to exceed interest expense" in the fourth quarter of fiscal year 2023, and interest income in the next quarter will exceed $300 million.
The second key metric has to do with the company's progress in capitalizing on artificial intelligence (AI) growth opportunities. At the financial report meeting for the third quarter of fiscal year 2023, Microsoft revealed that the number of customers of Azure OpenAI services has increased by 10 times in the third quarter of fiscal year 2023, reaching more than 2,500. Looking ahead, Microsoft expects revenue from Azure and other cloud services to grow 26%-27% year-over-year (in constant currency) in the final quarter of fiscal 2023. Notably, Microsoft expects AI-related services to account for 1% of Azure revenue growth in the fourth quarter of fiscal 2023.
The third key metric has to do with the company's capital allocation to investments. In the third quarter of fiscal year 2023, Microsoft's capital expenditures increased by 15% quarter-on-quarter to $7.8 billion, and are expected to continue to grow in the short term. According to Microsoft management's disclosure during its third-quarter fiscal 2023 earnings call, the company expects "substantial sequential growth in capital expenditures" in the fourth quarter of fiscal 2023, "driven by investments in Azure artificial intelligence infrastructure." ".
All in all, Microsoft's capex is growing due to AI-related investments, but it's reassuring that Microsoft has a large cash pile.
Microsoft's financial situation
Judging by S&P Capital IQ's short-term liquidity and long-term solvency data, Microsoft's financial position is very strong.
As of March 31, 2023, Microsoft's current ratio and quick ratio are 1.91 times and 1.66 times, respectively, which are quite good. This shows that Microsoft does not have a short-term liquidity problem, because its short-term assets also far exceed its short-term liabilities.
Microsoft's cash conversion cycle for the third quarter of fiscal 2023 is 8 days, which is calculated by adding days receivable and days inventory and subtracting days payable. A negative cash conversion cycle means that Microsoft receives cash from customers faster than it pays suppliers, which contributes to the company's rapid free cash flow generation.
Given Microsoft's leverage and coverage metrics, long-term solvency is not a significant risk factor. As of the end of the third quarter of fiscal 2023, Microsoft's total debt-to-equity ratio and total debt-to-equity ratio were 40.7% and 29.0%, respectively, which are quite good. In addition, Microsoft's trailing 12-month interest coverage ratio (earnings before interest and taxes divided by interest expense) is also as high as 39 times.
Microsoft's Balance Sheet
Beast Finance believes that a company has a good balance sheet if it has enough abundant cash to provide the financial flexibility to invest in difficult times, and Microsoft clearly meets this criterion.
As mentioned earlier, Microsoft's cash and short-term investments totaled $104 billion at the end of the third quarter of fiscal 2023. That equates to more than half of its annual revenue (based on fiscal 2022), or close to 5% of its current market cap.
Even adjusting for debt, Microsoft's net cash balance as of March 31, 2023 would still be about $25 billion.
What is Microsoft's current financial position?
Downside risks related to liquidity and solvency are limited for Microsoft. Microsoft's current ratio is well above 1.0 and the company's cash conversion cycle is negative, suggesting a low degree of short-term funding risk for Microsoft. Microsoft's financial leverage is also fairly low, so there should be no problem paying interest.
With sufficient financial backing, Microsoft's financial strength allows it to engage in counter-cyclical investments. Therefore, in the current environment where the economy is weak and high interest rates lead to financing difficulties, a cash-rich company like Microsoft has the opportunity to continue to make value-added investments (such as investing heavily in artificial intelligence) instead of like its peers and competitors. Constrained by high financial leverage and a weak balance sheet.
What are Microsoft's long-term prospects?
Beast Finance believes that Microsoft's healthy balance sheet has a very favorable impact on its long-term prospects.
In one of our previous articles on Microsoft, we cited research from Barclays Bank (BCS), which stated that Barclays expects that "by 2026, global revenue from AI-based applications will Doubled to $800 billion from $400 billion.” Microsoft management’s comments during its Q3 FY2023 quarterly earnings call are in line with sell-side forecasts for AI’s growth potential. During its third-quarter fiscal 2023 earnings call, Microsoft emphasized that it is "investing to lead the new wave of artificial intelligence" and "expanding our total addressable market size." Microsoft also emphasized that it has a "leading position" in artificial intelligence due to "our differentiations such as our partnership with OpenAI." Above we have mentioned the growth in the number of Azure OpenAI service customers and the contribution of artificial intelligence services to Azure's overall revenue growth, so this is a sign of Microsoft's leading position in the field of artificial intelligence.
According to a research report by McKinsey & Company, a study of more than 1,000 listed companies in Europe and the United States found that financial strength was the key factor that separated outperformers from underperformers during the global financial crisis. Specifically, McKinsey research shows that between 2007 and 2011, companies with higher retained earnings, stronger working capital positions, and lower financial leverage compared with their peers had higher total shareholder returns. There's reason to believe that Microsoft will emerge stronger from the current downturn relative to other companies, thanks to its financial strength, which allows it to invest aggressively in a new long-term growth opportunity -- artificial intelligence.
Is Microsoft stock a long-term investment?
Beast Finance believes that Microsoft has long-term investment value. In addition to the reasons we mentioned many times in previous analysis articles, Microsoft's balance sheet, financial situation, profitability, long-term prospects, cloud computing business, artificial intelligence, etc. It is one of the best in the whole world.
Microsoft's healthy balance sheet also supports its ability to make various investments/expansion for the future (such as investing heavily in artificial intelligence).