Microsoft's Q4 Earnings: AI Investments, Azure Growth, and Market Reactions

Microsoft Q4: A Solid, But Expensive AI Play (NASDAQ:MSFT)

AI opportunity, FCF growth, higher margins are reasons for my upgrade to hold, but shares of Microsoft are likely fairly valued. Microsoft (NASDAQ:MSFT) (NEOE:MSFT:CA) presented better than expected fourth fiscal quarter results on Tuesday, but shares have not reacted positively to the tech company's report card. The quarterly earnings sheet was impressive, however, in terms of free cash flow generation and margins and momentum in Azure Cloud growth, which is in part driven by new AI tools. Microsoft beat Wall Street's expectations on both the bottom and the top line, and the software company continues to have a lot of potential. While I like Microsoft's business setup, cash flow power and Cloud/AI momentum, shares are still a little bit on the expensive side. Given the strength in FCF margins, however, I am upgrading shares to hold! I rated shares of Microsoft a sell after the company's previous earnings report card -- Wait For A Drop Before Buying -- mainly because Microsoft's valuation had run ahead of the fundamentals, so my main argument. From a non-valuation point of view, however, Microsoft is executing very well, especially in the Cloud business, and the company has been able to grow its free cash flow margins in the last quarter. I am upgrading shares of Microsoft to hold due to growth in free cash flow and higher margins, but remain still a bit on the fence in terms of the company's high valuation. Microsoft generated $2.95 per-share in adjusted earnings in the fourth fiscal quarter on revenues of $64.73B. Earnings came in slightly better than expected (+$0.01 per-share) and revenues beat by $287.8M, chiefly because of continual Cloud momentum. Microsoft generated solid financial results for its fourth fiscal quarter, resulting in a top line of $64.7B. Revenues grew 15% year over year, which marked a 2 PP revenue growth deceleration compared to the previous quarter. Intelligent Cloud, which includes Microsoft's Cloud platform Azure, remained a growth engine for the software company and delivered by far the fastest segment top line growth with 19%. Overall, Microsoft's Q4'24 results were very solid, with double-digit revenue growth and free cash flow margins at their highest level in three quarters. Microsoft's Azure business kept up its solid performance in the June quarter, leading to revenue growth of 29% year over year. While growth slowed 2 PP quarter over quarter, Azure is by far the most significant segment for Microsoft in terms of revenue growth for Microsoft. No other segment is growing as fast as Cloud, which is the same take-away investors got from Alphabet's (GOOG) earnings release for Q2'24. Microsoft Azure continues to have attractive growth potential going forward as the number two ranked U.S. public cloud infrastructure company. Microsoft is investing heavily into its AI capabilities across its product stack, including AI-driven applications and security. One of the company's key products includes Azure AI, as an example, which includes large language model functionality that appeals chiefly to the enterprise market. Investors also shouldn't forget that Microsoft invested a solid $10B into OpenAI, the ChatGPT-creator, which increased the company's exposure to the AI market drastically last year. Microsoft is further investing into products such as Copilot AI, an AI-powered assistant that offers customers productivity tools. Copilot is very popular with enterprise customers and has seen growing product adoption by Fortune 500 companies this financial year. AI applications, whether in Microsoft 365's productivity suite or in the Cloud business, could be an accelerant for Microsoft's top line performance in the coming quarters and further help the company grow its free cash flow margins. When it comes to software companies, the most important figure to look at, in my opinion, is free cash flow because it is the ultimate amount of resources that are available to the company to finance new [AI] investments and that can be returned to shareholders, mainly through buybacks. In the June quarter, Microsoft generated $23.3B in free cash flow -- the largest quarterly amount in the last year -- which calculates to a free cash flow margin of 36% (the highest margin since the first fiscal quarter of FY 2024). Microsoft's 18% Y/Y growth in free cash flow and FCF margin expansion, combined with a recent drop in the share price, are the main reasons for my rating upgrade. (Source: Author) Microsoft's shares are not cheap and have not been for a quite a while. Investors love Microsoft's growth story, especially in Cloud/AI, which resulted in a 25% share price upside revaluation in the last year. Currently, shares of Microsoft are valued at a price-to-earnings ratio of 27.4X which compares to an industry group average P/E ratio of 25.7X. The industry group average includes the top five tech companies, Apple (AAPL), Amazon (AMZN), Alphabet, and Meta Platforms (META). Shares of Microsoft are also still trading above the longer term (3-year) average P/E ratio of 27.3X, so I believe MSFT is about fairly valued here. In my last work on the company, I indicated that I saw a fair value of $400, which I maintain following Microsoft's Q4'24 earnings. Relative to companies like Google and Meta Platforms, which are also extremely free cash flow-profitable, Microsoft's shares are expensive, however. Meta Platforms and Google are not only cheaper than Microsoft, but they are expected to grow their long term EPS (19% and 17%) at faster rates than Microsoft (13% in the long term). Google especially is an extremely attractive investment for Cloud/AI investors, chiefly because shares are so outrageously cheap given the opportunity for AI-driven growth: Google's Valuation Makes No Sense. The biggest risk for Microsoft, as I see it, is the potential slowdown in the Azure business as competition is heating up between the various public cloud infrastructure companies. Azure is still Microsoft's growth engine and the segment has considerable potential for growth given that companies are set to bring more AI workloads to the Cloud. What would change my mind about Microsoft is if the company were to see a drastic drop-off in its free cash flows and margins. Microsoft did not disappoint and delivered a solid earnings report for the fourth fiscal quarter that showed continual growth and momentum in Azure, Microsoft's Cloud platform, double-digit growth in free cash flow, higher FCF margins and the company remains attractive as an AI play as it invests billions of dollars into artificial intelligence opportunities across its product stack, led by Azure AI. Microsoft's free cash flow margins hit 36% in the last quarter and the company generates so much recurring FCF that it could acquire a ton of AI start-ups in the future or decide to return much more cash to shareholders. The only thing that I don't like as much is Microsoft's steep price. Given the strong AI monetization opportunity, growth in FCF and generally favorable outlook for Azure, however, I am upgrading my rating to hold despite my concerns about valuation!

Microsoft Q4 Earnings: AI Capital Expenditures Remain Strong And Growing (NASDAQ:MSFT)

Following the recent stock pullback, its P/E GAAP TTM has fallen to 33.8x, aligning closely with its 5-year average of 33.45x, creating an attractive buying opportunity. Microsoft Corporation (NASDAQ:MSFT) stock dipped over 3% following a slight miss on Azure revenue expectations for its fiscal Q4 earnings. The sentiment was further impacted by a global outrage, triggered by CrowdStrike (CRWD)'s software update affecting 8.5 million Windows devices. Despite playing the role of "victim," costing Fortune 500 companies $5.4 billion, MSFT's growth outlook remains strong, driven by significant capex on GenAI. However, recent comments from Google's (GOOGL) management during its Q2 earnings report have raised concerns among investors about the timeline for monetizing these billion-dollar AI investments, suggesting it may take longer than anticipated. In my previous coverage, I was bullish on MSFT due to Azure's growth reacceleration and a faster pace of AI monetization, especially with OpenAI's launch of SearchGBT, which poses strong competition to GOOGL. Despite the slowdown in Azure revenue, I believe the post-earnings selloff was primarily driven by high expectations for continued improvement in cloud growth and margin expansion. A slight YoY growth slowdown does not indicate that the company has completely lost its growth momentum, as management expects a rebound in cloud growth in 2H FY2025. As its valuation multiples have returned to their 5-year averages after the recent pullback, I reiterate my bullish view on the stock. While MSFT exceeded both revenue and GAAP EPS expectations, its Azure revenue growth showed a slight deceleration, increasing by 29% YoY, which was below market estimates and the company's previous guidance. Additionally, there was a modest QoQ growth slowdown in the Microsoft Cloud segment, which grew by 21.4% YoY compared to 23.2% in 3Q FY2024. In the 4Q FY2024 earnings call, MSFT continues to expect a double-digit top-line growth in FY2025. Particularly, Azure revenue growth in 1Q FY2025 to be in a range of 28% to 29% in constant currency, indicating a slight growth deceleration QoQ. However, management is confident that Azure's growth will reaccelerate in 2H FY2025 as previous capital investments lead to increased AI capacity to meet the growing demand. Overall, I believe that the 4Q earnings result was still robust, as the selloff reversed from 7% to 3% after the earnings call. The negative price action of the stock might imply a strong expectation in its cloud segment, as the stock's valuation multiples have been increasing over the past year. In addition, the Microsoft Cloud's gross margin contracted to 69% in the last quarter, dropping below the 70% threshold for the first time since 4Q FY2022. The result was also below the market consensus. Despite a contraction in its gross margin in the last quarter, the company mentioned 70% gross margin outlook in FY2025. Meanwhile, the operating margin was 43%, 70-bps higher than the midpoint of the previous guidance. However, this result showed a 160-bps contraction compared to the previous quarter and was 5 basis points lower than 4Q FY2023. This led to a soft GAAP EPS beat, with 4Q GAAP EPS only $0.02 ahead of estimates, implying a 9.5% YoY growth, which might disappoint some investors. MSFT's capex as a percentage of total revenue increased to 21.4% in 4Q FY2024, up from 17.7%, reaching a record high. This demonstrates that the company is still maintaining elevated capital investments in AI compared to other peers. Despite the elevated capex, the company's FCF grew 17.6% YoY in 4Q, largely driven by strong growth in OCF. The 4Q number will contribute to a 24.5% YoY growth in FY2024 FCF, marking the highest growth rate since FY2017. This demonstrates management's excellent execution in generating significant FCF while simultaneously increasing high capex on AI to maintain strong future growth. In addition, the company also anticipates a higher capex in FY2025 compared to last year. We saw its capex as a percentage of revenue has been rising, which, I believe, is a bullish signal in the AI race, especially when compared to Google's capex outlook last week. Unlike Google Search, where users type keywords and receive content based on relevance without the ability to change the sequence, SearchGBT provides relevant and more accurate summaries of each search result. It has clear citations and allows users to ask follow-up questions. This prototype collaborates with many publishers and creators, including WSJ and The Atlantic, and OpenAI is considering integrating it directly into ChatGPT, enabling cross-sharing of the user base. Although SearchGBT still in its early stages and OpenAI currently experiencing significant operating losses, the company might develop a monetization strategy, such as leveraging its advertising business to diversify its revenue mix. As GOOGL faces an antitrust trial over its dominant position in the digital advertising business, MSFT could potentially gain market share from Google in the long term. There was a selloff in GOOGL's stock following the news release last week. Due to the recent stock pullback, Microsoft's valuation multiples have come closer to their 5-year averages. Considering the post-earnings selloff, its P/E GAAP TTM has decreased to 33.8x, in line with its 5-year average of 33.45x according to Seeking Alpha. Factoring in street consensus on the company's EPS growth in FY2025, the multiple will be 30x, which is only 6% higher than Nasdaq 100-Index's (NDX) P/E fwd. Currently, the stock is trading at a premium of 12.6x EV/Sales fwd compared to the software large-cap average of 10.4x according to J.P. Morgan. However, I believe the company will sustain its current growth trajectory due to its AI monetization on strong capital investments, justifying a higher-than-average valuation multiple. Therefore, the post 4Q earnings selloff creates an attractive buying opportunity. In conclusion, despite a recent pullback in MSFT's stock following a slowdown in Azure revenue, the company's growth trajectory remains robust. The temporary setback in Azure growth is expected to be mitigated by substantial investments in AI and a strong capex commitment, which are likely to drive a reacceleration in 2H FY2025. The recent decline in valuation multiples to near their 5-year averages shows an attractive buying opportunity, as the market's high expectations have been reset due to the broad-based pullback. Therefore, I maintain a buy rating on the stock, as ongoing AI monetization and significant capex investments are likely to drive long-term growth.

Microsoft: Down 6% On Q4 2024 Earnings After Azure Miss, Did AI Bubble Pop? (NASDAQ:MSFT)

Despite reporting a double beat for Q4 FY-2024, Microsoft Corporation (NASDAQ:MSFT) stock has tumbled by more than -6% to $396 per share in the after-hours session. Heading into today's report, Microsoft was sitting 10% off of its highs, and so, we are firmly in the correction territory now. In this article, we shall investigate Microsoft's Q4 FY2024 report and re-evaluate its long-term risk/reward to make an informed investment decision. For Q4 FY2024, Microsoft reported a double beat, with total revenues of $64.7B (+15% y/y, vs. est. $64.4B) and diluted EPS of $2.95 (+10% y/y, vs. est. $2.94); however, the quantum of the beat was minuscule. As you can see above, Microsoft's Productivity & Business Processes [$19.6B, +12% y/y] and More Personal Computing [$15.6B, +17% y/y] segments exceeded management's guidance range, the Intelligent Cloud business [$28.5B, +21% y/y] was closer to the lower end of management's guided range of $28.4-28.7B, with deceleration in Azure Cloud growth rate from 31% y/y in Q3 to 29% y/y in Q4. Last week, Alphabet reported an acceleration in Google Cloud Platform revenues (from 28% y/y to 29% y/y); hence, the deceleration in Microsoft Azure is a real negative surprise! While Azure numbers look disappointing, Microsoft's Search and News Advertising revenues jumped +19% y/y, a significant acceleration from last quarter's 12% y/y growth. Finally, AI-powered Bing showing some progress! Now, during Q4 FY2024, Microsoft's operating expenses grew by +13% y/y while the revenue growth rate moderated to +15% y/y. Consequently, Microsoft generated $37.2B in cash flow from operations (+29% y/y) and $23.3B in quarterly free cash flow (+18% y/y) in Q4. From these free cash flows, Microsoft returned $8.4B to its shareholders in the form of share repurchases ($2.8B) and dividends ($5.6B). Microsoft is still a giant cash printing machine; however, with the gap in its revenue and operating expenses growth rates narrowing in recent quarters, concerns about Microsoft's operating leverage (margin expansion) story hitting a snag have been rising. However, Microsoft's FY2025 outlook calls for double-digit revenue growth and single-digit operating expenses growth: Hence, I am no longer worried about Microsoft's operating leverage. For Q1 FY2025, Microsoft's management guided for deceleration across the business, with total revenues expected to come in at $64.3B at the midpoint of the guidance range, a figure that fell short of pre-Q4 consensus street estimates for Q1-FY2025 revenue of $65.45B. Furthermore, Microsoft's leadership guided for increased CAPEX spending in FY2025, with Q1 FY2025 CAPEX set to rise sequentially from the $19B Microsoft spent in Q4 FY2025. With roughly half of this CAPEX spend going into real estate and infrastructure, Microsoft's management sees this spending as a long-term asset that will be monetized over 15 years! Also, Microsoft's leaders - Satya Nadella and Amy Hood - expressed a belief that Microsoft's increased CAPEX spend is a sign of higher AI demand; however, while doing so, they mentioned architectural consistency between cloud and AI infrastructure, i.e., if Microsoft ends up overbuilding AI capacity, they will monetize the GPUs via cloud computing demand. This sort of language was utilized by Alphabet's leadership, too. Unfortunately, both Nadella and Pichai failed to provide a real answer on the ROI (quantum and timeframe) of the ongoing AI infrastructure spending. Yes, it might be too early to make an assessment; however, with elevated CAPEX spending about to apply pressure on FCF generation, stock prices could get hurt in the near term if the return on investment remains uncertain. Overall, Microsoft's Q3 FY2024 report is mixed. While the company beat top and bottom-line estimates, it failed to meet lofty investor expectations. Despite increasing its AI CAPEX spending, Microsoft's Azure Cloud revenue unexpectedly decelerated in Q4. This raises question marks over the future ROI on the ongoing CAPEX spending cycle and, in my view, puts a richly valued MSFT stock in the penalty box for the next quarter at the very least. Let us now re-evaluate MSFT stock in light of these Q4 FY2024 numbers. In Microsoft: Bubble, Bubble Toil, And Trouble, I shared detailed reasoning behind our model assumptions for Microsoft. For today's evaluation, we're sticking to all of our past assumptions, with the only change coming in the form of the model's revenue base - TTM revenue now stands at $245.3B Now, despite using aggressive assumptions for long-term growth and steady-state margins, Microsoft continues to look overvalued, albeit the gap to fair value has narrowed to ~15% in light of the ongoing correction in MSFT stock: According to our valuation model, Microsoft's fair value estimate is ~$331 per share (or ~$2.5T) [up from $320 per share or ~$2.4T at the last assessment]. With the stock trading at ~$396 per share, I now see a downside of -16% to fair value in MSFT stock. Predicting where a stock will trade in the short term is impossible; however, over the long run, a stock will track its business fundamentals and obey the immutable laws of money. If the interest rates were to return to artificially low levels (i.e., ZIRP), higher equity multiples would be justifiable. However, I work with the assumption that interest rates will eventually track the long-term average of ~5%. Inverting this number, we get a trading multiple of ~20x (P/FCF). Assuming a base case exit multiple of 20x P/FCF, I see Microsoft stock rising from ~$396 to ~$509 per share in the next five years at a CAGR of 5.16%. Since MSFT's expected return falls well short of our investment hurdle rate of 15%, I am still not a buyer here. While MSFT looks unattractive when compared to the S&P 500's (SPY) long-term average return of ~8-10%, Microsoft's 5-year expected return is now better than treasury yields [~4-5%]; hence, Microsoft is no longer "Sell" under our valuation process. Henceforth, I am upgrading MSFT stock to a "Neutral/Hold" rating. Microsoft is one of the perennial "buy the dip" stocks, and so, most investors are likely chomping at the bit to buy the ongoing ~16%+ correction in MSFT stock. While I continue to think of Microsoft as an incredible company, its long-term risk/reward doesn't justify the allocation of fresh capital just yet. That said, Microsoft's 5-year expected CAGR return now exceeds risk-free government treasury rates, and this is why I am upgrading MSFT stock to a "Hold/Neutral" rating. As of Q4 FY2024, Microsoft is performing exceptionally well right now (despite the slight deceleration in Azure). In the event of a hard landing, we could see Microsoft retracing to its fair value (and who knows, it could probably overshoot to the downside, like in previous economic downturns). If the long-term risk/reward for MSFT stock improves beyond my investment hurdle rate of 15% CAGR through a time or price correction, I will happily turn bullish. Key Takeaway: I rate Microsoft a tactical "Sell" in the $400s. Thank you for reading, and happy investing! If you have any questions, thoughts, and/or concerns, please feel free to share them in the comments section below.

Microsoft Q4: Buy The Correction (NASDAQ:MSFT)

Looking for a portfolio of ideas like this one? Members of Envision Early Retirement get exclusive access to our subscriber-only portfolios. Learn More " I last covered Microsoft Corporation (NASDAQ:MSFT) stock earlier this month with a hold rating. As illustrated by the screenshot below, that article was titled "I Underestimated the Pace Of AI Infusion" and was published by Seeking Alpha on July 8, 2024. In that article, I analyzed its AI potential and expressed my reservations about the valuation (at a P/E of ~40x at that time). Quote: My verdict is that MSFT is still a solid hold for current shareholders. The giant still boasts strong growth potential, especially considering the synergies between Artificial Intelligence and its Azure cloud. My assessment is that the AI initiatives are already enhancing its profitability and the company is already at a point to deploy AI at an even larger scale. The 40x P/E can be off-putting. But the growth and profitability potential still offer good odds for market-beating total returns in the long term. Since then, there have been a few changes surrounding the stock. First and foremost, the company has released its FY Q4 2024 earnings report (the "ER"). The company reported robust results in my view (more on this a minute later). However, the market response was negative and caused a share price correction of about 4% (during extended hours trading). All told, the stock prices hovered around $408 as of this writing, about 12.4% below the price at the time of my last publication ($466). Combining the EPS growth reported in Q4 ER, such a price correction translated into a substantial P/E contraction to about 32x compared to the 40x at my last writing. Given the new developments described in the ER and the significant valuation change, I think an updated assessment of the stock would be helpful. And in the remainder of this article, I will explain why the current conditions offer an enticing entry opportunity for potential MSFT investors. As just mentioned, the company reported solid results for Q4 in my view. The next chart summarizes its financial performance during the fiscal quarter. As seen, revenue increased 15% year-over-year to $64.7 billion. On a constant currency basis (CC basis), the growth is even better at 16%. The growth was driven by robust performance across its operating segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. Notably, Intelligent Cloud led the growth with a 20% YOY rate on a CC basis. Bottom-line metrics are equally impressive. The gross margin dialed in at 70%, operating income grew 16% YOY on a CC basis, and net earnings grew 11% on a CC basis. More importantly, to be elaborated on next, I see plenty of catalysts to drive continued growth and superb profitability. Looking ahead, the consensus EPS estimates expect the above growth rate to continue. As an example, the top panel of the next chart summarizes consensus EPS estimates for the next two fiscal years. As seen, the estimates imply an annual growth rate of 15% for its EPS. Note that there is a certain degree of variance among the estimates, and I am relying on the mid-point of the estimates here. This growth translates into an EPS increase to $13.3 for FY 2025 and then to $15.3 in 2026. Such a growth scenario would further shrink the P/E to 30.8x on an FY1 basis and only 26.8x on an FY2 basis. Later, I will explain why these multiples are very attractive entry points, especially for investors oriented toward the long term. As shown in the bottom panel of the chart, the consensus estimates project MSFT's top line to grow at the same annual rate of 15%. To wit, the estimates project a growth from $280B in FY 2025 to $321 in FY 2026. I am not here to argue with such growth rates. As analyzed in my earlier article, I see good reasons for MSFT to achieve such rates. However, I do think the consensus projection underestimated the possibility of a margin expansion. By projecting the same 15% growth rates for both the top-line and bottom line, the market essentially expects MSFT's profit margin to remain unchanged. In the bottom panel of the chart, I also estimated the net profit margins implied by the above topline and EPS projections from the consensus. Note that my estimate assumed MSFT's number of outstanding shares to remain constant at the current level of 7.54 billion shares. Based on this assumption, the implied net profit margin turned out to be 35.3% for FY 2025 and 35.5% for FY 2026. The above implied margin is on the conservative side in my mind for several reasons. To start off, the implied margin is actually lower than Microsoft's current margin. As seen in the next chart, MSFT consistently maintains a higher level of profit margin among its close peers and the current margin is 36.43%, about a whole 100 basis points above the projected margins implied by consensus estimates. I don't think its superior margin is incidental at all. It is fundamentally rooted in its business model and competitive advantage such as its stronger software dominance, highly sticking income sources (think Windows and Office), diversified yet highly complementary segments, etc. Second and more important, I see good odds for the margin to further expand as the company is poised to deploy AI at scale. I see a multitude of possibilities that AI infusion can further boost MSFT's net profit margin, and here I will limit myself to the top two on my list for the sake of brevity. AI-powered features can significantly increase the perceived value of MSFT products, allowing for premium pricing and improved customer retention. And MSFT's progress thus far is already showing great promise on this front in my view. For example, AI-driven automation in Office 365 and co-Pilot on Windows could justify higher subscription fees and create new recurring revenue streams. AI can also help to optimize internal processes, reduce operational costs, and improve resource allocation. For instance, AI-powered predictive maintenance in Azure could minimize downtime and lower infrastructure expenses to boost margins. In terms of valuation, the current FWD P/E of ~32x (or about 30x based on FY 2025 EPS projection) admittedly is not cheap by any standards. However, as repeatedly argued in my earlier articles, long-term investors who think like business owners should not be automatically turned off by a 30x P/E. For stocks with superb ROCE (return on capital employed) like MSFT, a 30x P/E can still offer excellent long-term returns. MSFT's ROCE is around 80% based on my estimates currently as seen in the next chart below. At this level of ROCE, a 5% investment rate would support 4% organic growth in the long term (80% ROCE * 5% reinvestment rate = 4% growth rate). Note this is the real growth rate. Adding an inflation escalator of 2.5% would push the notional growth rate to 6.5%. A ~30x P/E provides ~3.3% of the accounting earnings yield. However, for MSFT, accounting earning yield is an underestimate of its owners' earning yield due to its capital-light and highly scalable business model. The owner's earnings yield is about 4% in my analysis. Thus, even at a 30x P/E entry, the total return potential for long-term investors could be close to 10%. In contrast, the overall market is currently trading at about the same P/E yet offers far lower ROCE (on average about 20% only) and far fewer growth areas to reinvest than MSFT in my view. In terms of downside risks, most of the generic risks have been thoroughly discussed in other review articles already. To briefly recap, these risks include macroeconomic and geopolitical risks, regulatory risks, its heavy reliance on the Windows operating system (which could expose it to potential disruptions from open-source alternatives), etc. Here I will point out an ongoing risk that is more particular to MSFT: the recent Activision acquisition. I feel positive about this acquisition in general. I think Activision's popular names (such as Call of Duty and Candy Crush) and its huge mobile user base (which MSFT lacks) are high-value assets to MSFT and can substantially boost Microsoft's game pass subscription service. However, the integration is still ongoing, and the final verdict is yet to come. Especially in the near term, the integration could lead to negative financial impacts. Merging two large corporations can be complex and costly. Integrating Activision's operations, systems, and culture into Microsoft's could lead to significant expenses and operational inefficiencies in the short term, as you can see from the following report from its Q4 ER. All told, I think the positives outweigh the negatives and I see a return/risk profile with a clear bias under current conditions. Besides the rapid progress of AI infusion (the focus of my last article), I see several other new catalysts in its Q4 ER. Notably, I see the potential of margin expansion that is currently underestimated by consensus. Furthermore, the price correction, combined with earnings growth in the past quarter, has brought the valuation to a quite reasonable level for long-term holding.

'In the eye of the beholder:' Microsoft slips as Wall Street debates AI upside

Microsoft's (NASDAQ:MSFT) fiscal fourth-quarter results and guidance for the next quarter had Wall Street debating on whether there was enough to keep the artificial intelligence-inspired gravy train running, or whether it may be losing steam. Among the more bullish takes was one from Wedbush Securities analyst Dan Ives, who said the conference call was "validation" for investors who needed to hear AI monetization trends are chugging along. "With the investor world all watching Microsoft's results last night we would characterize the conference call and FY25 guidance as very bullish as [Satya] Nadella and CFO Amy Hood talked about a stronger commercial bookings in the June quarter and most importantly Azure growth that should 'accelerate in the second half' off a 29% baseline growth number," Ives wrote in an investor note. "This was a validation conference call and guidance for the MSFT cloud story and the broader AI Revolution taking place across the tech world. The Street wanted and needed to hear it...and Nadella & Co. delivered the AI monetization comments heard around the market." Ives maintained his Outperform rating and $550 price target. However, he noted the fourth-quarter itself was "fine" and could "disappoint some hoping for more." Microsoft said it expects first-quarter revenue to be between $63.8B and $64.8B, compared to the $65.07B estimate. Azure is expected to grow between 28% and 29% year-over-year in constant currency, with Intelligent Cloud between $28.6B and $28.9B, up between 18% and 20%. Hood added on the conference call that Azure growth is expected to "accelerate" in the second-half, "as our capital investments create an increase in available AI capacity to serve more of the growing demand." Bank of America analyst Brad Sills was also positive on Microsoft, as he pointed out that the second-half acceleration for Azure "suggests that softness is likely to be short-lived." "Adoption of Microsoft native AI services running on Azure are gaining strength (e.g., Azure AI Services and the Fabric data/analytics platform)," Sills wrote in an investor note. "Expect platform leverage to offset capex/margin pressure. The outlook for [a] 100 basis point margin decline in FY25 is unchanged, as the gross margin drag from growing AI mix is somewhat offset by scale in other businesses, such as core Azure. This speaks to the platform capability built into Microsoft's model, whereby the same AI stack that is running OpenAI LLMs is leveraged across other AI enabled services such as GitHub Copilot, Microsoft 365 Copilot and the Azure AI library." Sills raised his capex estimate for fiscal 2025 to $58.3B from $53.8B, but also noted that accelerating revenue growth and platform scale are likely to occur as well. "We view Q4 as a quarter where the stock is growing into a premium multiple," Sills added. He reiterated his Buy rating and $510 price target on the stock. Others were less positive on Microsoft's quarter and guidance, as Citi analyst Tyler Radke pointed out the results had "something for everyone." "The quarter saw a skinny revenue/EPS beat, a slowdown in Azure and weaker Q1 guidance," Radke wrote. "While fair nits, leading AI/demand indicators remain objectively positive with 19% YoY cc commercial bookings growth, ramping capex($19B vs. $16B estimate) with management citing a 2H acceleration in Azure as capacity comes online. The smaller beat and softer guide imply slight negative near-term estimate revision trends, which could weigh on shares ... but we believe the weakness will be short-lived with leading indicators offering confidence in a 2H acceleration in Azure, and a margin outlook(-100 bps) that looks conservative." Radke reiterated his Buy rating but lowered his price target to $500 from $520. KeyBanc Capital Markets analyst Jackson Ader also focused on the Azure slowdown and the huge increase in capex spending. However, he added that since Azure is still capacity-constrained on the AI front, there is some "wiggle room" ahead of the expected acceleration in the second half of the year. Ader reiterated his Overweight rating and $490 price target on Microsoft and said the capacity issues may give Microsoft some "extra leash" on the spending side, as cash spending rose $5B sequentially and 75% year-over-year.

Microsoft By The Numbers: Past Performance And Future Valuation (NASDAQ:MSFT)

Microsoft's past performance has consistently beaten the S&P 500, with a 5-year target price of $771 per share, showing 84% upside potential. The market, especially the chip and AI sectors, have been anxiously awaiting earnings reports from some leading tech stocks. The Nasdaq is currently in the midst of an 8.2% correction since its all-time high set just a mere three weeks ago on July 10. During that time, the chip sector, as measured by the VanEck Semiconductor ETF (SMH), has been hit even harder with a correction of 19.4%. Additionally, one of the main leading stocks in the market, Nvidia Corporation (NVDA) stock is down by a whopping 26.3% during that same time. Have the fundamentals of the tech stocks-and more importantly, the chip stocks-changed drastically? Or is this just a routine round of profit-taking following a torrid run of these stocks during the first half of 2024? I anticipate we will learn much more about the current state of the core tech stocks as we see more earnings reports this week. Microsoft Corporation (NASDAQ:MSFT) was the second notable tech stock, after Alphabet (GOOG) (GOOGL), to report earnings during this Q2 2024 earnings season. Alphabet's earnings last week were sub-par and did not help the current correction in the Nasdaq. Microsoft's earnings beat its top and bottom-line estimates, but its guidance on cloud business came in a little soft, resulting in a dip in the stock price. As of Tuesday, July 30, The stock was down over 7% at the beginning of the after hours session, but recovered a fair amount during the nighttime session, but was still down 3% with about 2 hours before the market opened. Just after market close on Tuesday, July 30, Microsoft reported earnings that beat by $0.02 and sales that beat by $260 million. Overall, revenue grew by 15% versus the same quarter last year and earnings grew by 10%, which are still impressive growth numbers for a $3.14 trillion behemoth. Microsoft remains a Best Stock Now as opposed to the stodgy old-growth giants of yesteryear like IBM, Intel (INTC), and AT&T (T), to name a few. Current Analysis of Microsoft Let's begin our current analysis of Microsoft by looking at their past performance. If you are seeking alpha, past performance is a good place to start. If the company has a history of delivering alpha, it is more likely to continue on the path. Here is the performance of Microsoft versus the S&P 500 over the short term (one year or less), intermediate (3-5 years), and long term (5-10 years). As illustrated by the graphic above, the company has handily beaten the S&P 500 over the last 1, 3, 5, and 10 years. It has demonstrated its ability to steadily deliver alpha over the years, and earning it a high ranking among the 5,340 stocks in my database. Now the question is, can they continue to deliver alpha going forward? Let's look at a 5-year valuation for some guidance on finding an answer to that question. I begin with this year's EPS estimate of $13.31 per share and next year's estimate of $15.54 per share. Notice how the company has consistently grown its earnings over the last five years. Also notice how the stock price follows those earnings. An elementary rule to learn in the market is that stocks and indexes follow earnings. The consensus on the street, according to FactSet Research, is for Microsoft to continue to grow its earnings by an average of 16% per year over the next five years. I am at 15% per year. Using those assumptions and applying an appropriate multiple for the stock, which I've determined to be 33X, this yields a 5-year target price of $771 per share. This gives the stocks just over 84% upside potential over the next 5 years. Which is still satisfactory and meets my criteria of 75% or more upside potential while also giving a good risk to reward ratio and decent margin for error. In my Best Stocks Now strategy of stock selection, I consider both past performance and valuation. This looks both backwards and forwards. Using my proprietary formula, Microsoft still meets my strict criteria. We continue to own the stock in both our Premier Growth and Dividend & Growth Portfolios. These are two of the five portfolios that I offer in my premium service.

Microsoft's Q4 Results 'Fine' But Not 'Blowout,' Says Top Analyst: Why Azure Slight Miss Has A 'Unique Sting?' - Microsoft (NASDAQ:MSFT)

The company discussed AI monetization trends that should accelerate in FY25 as more enterprise customers, note Gene Munster. Microsoft Corp. MSFT shares fell late Tuesday after the software giant's cloud revenue missed forecasts and forward guidance came in shy of estimates of some analysts. Market watchers and analysts apparently weren't overly concerned by what was perceived as sore spot by investors. Future Perfect: The conference call was bullish, with CEO Satya Nadella and CFO Amy Hood talking about stronger commercial bookings for the June quarter and hinting at acceleration in Azure revenue in the second half of the year, of a 29% baseline growth, said Wedbush analyst Daniel Ives. "This is the most important data point from the conference call in our opinion as MSFT discussed AI monetization trends that should accelerate in FY25 as more enterprise customers head down the Azure/Copilot and AI roadmap for their organizations," the analyst said. Ives termed the quarter as "fine," but not a "blowout," typical of Microsoft's June quarter. It disappointed some investors, Ives said, making sense of the sell-off. The guidance for headline metrics was mostly in-line, he added. "Nothing from this quarter or conference call makes us less bullish in our AI thesis....and ultimately the validation from the key perch of Nadella and Microsoft give MORE credence to the AI Revolution story....not less despite a modest sell-off after hours," Ives said. Wedbush maintained an Outperform rating and a $550 price target for the shares. See Also: Best Artificial Intelligence Stocks Sell-Off Insane: CNBC Mad Money host Jim Cramer said the after-hours decline seen in Microsoft shares before the conference call was a "little insane." "I am saying that the decline we saw before the conference call was a little insane...By the way, Pinterest wasn't even that bad. AMD was great," he said. Cloud - The Pressure Point: Microsoft beat 11 of the 12 operating metrics and the only miss was in the Intelligent Cloud business, which comprises the Azure public cloud business, said Deepwater Asset Management's Gene Munster. The miss was only a modest 0.6%, he said. "The result: Stock is down 7%. This defines pressure point," he added. Looking at the Azure miss from another perspective, the tech venture capitalist said, Azure's slight miss has a "unique sting" given it is now growing at the same pace as Alphabet, Inc.'s GOOGL GOOG Google Cloud Platform. GCP grew at a 29% pace, he noted. This suggested Azure is gaining a share on Amazon, Inc.'s AMZN AWS and not on GCP. Munster also sees Microsoft's growing capex as a good thing. The 51% year-over-year growth in capex may pressure margins in the near term but long term it would push the company higher, he said. The tech analyst expects Microsoft's higher capex plan to bode well for companies such as Nvidia Corp. NVDA and Taiwan Semiconductor Manufacturing Company Limited TSM. In premarket trading on Tuesday, Microsoft shares fell 2.37% to $412.89, according to Benzinga Pro data. Read Next: Nvidia, AMD, Microsoft, Meta, Tesla: Why These 5 Stocks Are On Investors' Radars Today Photo via Shutterstock Market News and Data brought to you by Benzinga APIs

Microsoft Corporation : Microsoft

Microsoft has published its financial results for the quarter ended June 30, 2024, the fourth quarter and the full year 2024, as the company publishes on a delayed basis. The company posted a solid performance compared with the same period last year, in line with expectations, but the cloud segment disappointed slightly in terms of growth. Investors' very high expectations were not fully met by these results, which were nevertheless very good overall, with 15% YoY sales growth, record innovations and bookings. It has to be said that the bar was set high before these publications. Investors were mainly focused on growth in cloud services, which fell short of expectations. The stock was down 3% after yesterday's close. Satya Nadella, CEO of Microsoft, emphasized that these results reflect the company's capacity for innovation and the continued confidence of customers. He added that Microsoft strives to meet critical customer needs while remaining at the forefront of the artificial intelligence (AI) era. Amy Hood, executive vice president and CFO, noted that the quarter ended with record bookings and quarterly Microsoft Cloud sales of $36.8 billion, up 21% (22% at constant exchange rates). Data by segment The Intelligent Cloud segment (Azure, Window Server, SQL Server, System Center, GitHub, Nuance, etc.) was up by 19%, driving Group growth, while the traditional Productivity and Business Processes segment (Office and Dynamics services, as well as LinkedIn) grew by 11%. The Personal Computing segment (Windows, Devices, Xbox and Search) grew by 14%. For the fiscal year ending June 30, 2024, Microsoft also posted solid results, with sales of $245.1 billion, up 16% (15% at constant exchange rates), operating income of $109.2 billion, and earnings before interest, taxes, depreciation and amortization of $109.2 billion.operating income of $109.4 billion, up 24% (22% non-GAAP, 21% at constant exchange rates), net income of $88.1 billion, up 22% (20% non-GAAP), and diluted earnings per share of $11.80, up 22% (20% non-GAAP). These results demonstrate Microsoft's robustness in various market segments, supported by strong demand for its cloud services and AI solutions. "As a platform company, we are focused on meeting the critical needs of our customers through our platforms at scale today, while ensuring that we lead the AI era. "Satya Nadella Indeed, investors expect a lot from the cloud and AI segment. Azure revenues grew by 29%, with strong demand for AI services. The group still anticipates sustained growth in Azure services in Q1 2025 at 28-29% YoY. Microsoft has expanded its datacenter infrastructure across four continents and Azure AI now has over 60,000 customers, up almost 60%. GitHub Copilot, the AI-powered development tool, is adopted by over 77,000 organizations, up 180%. GitHub has achieved an annual revenue rate of $2 billion, with Copilot accounting for over 40% of this growth. Microsoft values itself at 31.6 times 2025 earnings. Capex spending must now be converted into operating income over time to merit continuing to value itself at such a multiple. These should continue to rise in 2025. With regard to Capex, Satya Nadella explained that capital investment is primarily demand-driven, and that Microsoft is well positioned to capture opportunities with a diversified product portfolio. Amy Hood added that long-term assets, such as land and data centers, are managed flexibly to meet demand. Microsoft generated $23,322 million in free cash flow in the quarter ending June 30, 18% more than last year. Microsoft will return $8.4 billion to shareholders in the form of share buybacks and dividends in the fourth quarter of 2024.

4 Key Takeaways From Microsoft's Earnings Call

Naomi Buchanan is a reporter at Investopedia breaking down news stories that impact investors. After Microsoft (MSFT) reported better-than-expected earnings for the fiscal fourth quarter but its cloud growth missed estimates, executives gave investors an update on the tech giant's investments in artificial intelligence (AI), capacity constraints, outlook, and more in the company's earnings call. Microsoft CFO Amy Hood said that the company's AI-related capacity lagging demand, coupled with weakness in some European regions, contributed to the company's softer-than-expected cloud growth. The CFO said there "was some softness on non-AI consumption" in some European markets, and that "capacity constraints particularly on AI and Azure" contributed to cloud revenue coming in at the lower end of previous guidance ranges. Hood added that AI capacity could continue to lag behind demand until the second half of 2025. Microsoft, along with many of its big tech peers, is boosting its investments in AI to secure its position as a leader in the space, raising concerns about higher costs. When asked about how the company's investments could pay off, Microsoft CEO Satya Nadella said capital expenditures are being guided by "demand signals," including Azure AI growth, and that the company's spending would change if demand shifts. Microsoft executives said current capital spending would allow the company to meet AI demand in the second half of fiscal 2025, which could drive revenue gains. Hood said nearly all of Microsoft's $19 billion in capital expenditures were related to cloud or AI investments. Around half of the spending was dedicated to infrastructure, with the company building and leading data centers, that the CFO said "will support monetization over the next 15 years and beyond." Executives told analysts that the company views its investments in AI infrastructure and data centers as long-term assets and emphasized their flexility, echoing similar comments from Alphabet (GOOGL) CEO Sundar Pichai last week suggesting the flexibility of AI infrastructure solutions like data centers could lower the risk of overinvesting in the technology. Hood said Microsoft anticipates double-digit revenue growth in fiscal 2025 as the company works to raise capacity to meet demand. The CFO said that cloud revenue is expected to grow between 28% and 29% year-over-year in the first quarter of fiscal 2025. Microsoft shares were down close to 3% at $411.40 in extended trading as of 8:40 p.m. ET Tuesday following the company's earnings call.

Microsoft stock tumbles after key segment disappoints

Microsoft posted stronger-than-expected fourth-quarter earnings Tuesday, but a modestly weaker growth rate in its flagship cloud division and a big jump in AI spending sent shares sharply lower in after-hours trading. Microsoft (MSFT) said earnings for the three months ending in June, the group's fiscal fourth quarter, rose 9.7% from last year to $2.95 per share, topping Street forecasts of $2.94 per share. Group revenues, Microsoft said, rose 15.1% to $64.7 billion, above analysts' forecasts of $64.4 billion. Revenues for Microsoft's Azure cloud division, its biggest growth driver, were up 29%, just shy of the Street's 30% forecast. Overall Intelligent Cloud revenues rose 19% to $28.52 billion, just missing the Street's $25.8 billion forecast. Microsoft noted, however, that around 8 percentage points of Azure growth came from AI investments, a larger figure than the 7 percentage point boost from the prior quarter. Capital spending for the quarter rose 77.6% from last year to $19 billion, well ahead of the $14 billion tallied over the three months ending in March. "Our strong performance this fiscal year speaks both to our innovation and to the trust customers continue to place in Microsoft," said CEO Satya Nadella. "As a platform company, we are focused on meeting the mission-critical needs of our customers across our at-scale platforms today while also ensuring we lead the AI era," he added. Related: Microsoft earnings: Azure growth, AI spending key as big tech wavers Microsoft shares were marked 5.1% lower in after-hours trading immediately following the earnings release, indicating a Wednesday opening bell price of $401.50 each. In other divisions, Productivity and business revenues, which includes Office 365, were up 11% from last year to $20.3 billion, Microsoft said, while More Personal Computing revenues, which includes Windows, were up 14% to $15.9 billion. Related: Veteran fund manager sees world of pain coming for stocks

Microsoft tumbles amid weak Azure growth (MSFT)

Microsoft shares fell nearly 7% in extended hours trading on Tuesday after the tech giant reported fiscal fourth-quarter results that topped expectations, but Azure growth was weaker-than-expected. For the period ending June 30, Microsoft earned $2.95 per share as revenue rose 15% year-over-year to come in at $64.7B. Included in that was $28.52B from its Intelligent Cloud division, which consists of its Azure cloud unit. Microsoft said Azure revenue grew 29% year-over-year and 30% in constant currency. The company previously said it expected Azure to grow between 30% and 31% in constant currency, and some analysts previously said they expected more than 30% growth. Total cloud related revenue was $356.8B for the period, below the $36.84B estimate. Included in Productivity and Business Processes was a 12% year-over-year rise in Office Commercial revenue (13% in constant currency), while Dynamics 365 saw revenue growth of 19% over the same time frame. LinkedIn, its business-focused social network, had a 10% jump in sales, or 9% in constant currency. Xbox content and services revenue increased 61%, largely driven by Microsoft's acquisition of Activision. "Our strong performance this fiscal year speaks both to our innovation and to the trust customers continue to place in Microsoft," said Satya Nadella, chairman and chief executive officer of Microsoft. "As a platform company, we are focused on meeting the mission-critical needs of our customers across our at-scale platforms today, while also ensuring we lead the AI era." A consensus of analysts expected the company to earn $2.94 per share on revenue of $64.44B. The company will host a conference call at 5:30 p.m. EST to discuss the results and provide guidance.

Microsoft Cloud Miss Overshadows Earnings Beat

Shares of Microsoft tumbled in extended trading Tuesday following the company's earnings release. Microsoft (MSFT) reported better-than-expected earnings and revenue for the fourth quarter of fiscal 2024, but growth in its cloud segment missed estimates, sending shares tumbling in extended trading Tuesday. The company reported fourth-quarter revenue of $64.7 billion, a 15% jump year-over-year, and above analysts' estimates compiled by Visible Alpha. Net income came in at $22 billion or $2.95 per share, up from $20.08 billion or $2.69 per share a year earlier, also beating projections. For the full fiscal year of 2024, revenue and net income were in line with analysts' expectations at $245.1 billion and $88.1 billion, respectively. "As a platform company, we are focused on meeting the mission-critical needs of our customers across our at-scale platforms today, while also ensuring we lead the AI era," Microsoft CEO Satya Nadella said in a release. Microsoft said its results in the fourth quarter and the fiscal 2024 year were driven by strength in its cloud segment, though Microsoft's cloud growth missed expectations. Microsoft Cloud's revenue in the fourth quarter was $36.8 billion, up 21% year-over-year, but short of the $37.2 billion that analysts anticipated. Shares of Microsoft fell over 5% in after-hours trading to $399.38 as of 4:45 p.m. Tuesday following the company's earnings announcement.