Re-Evaluating Microsoft's Growth Outlook
Looking ahead, it's believed that Azure and AI will be the key growth drivers for Microsoft, while traditional cash cows like Windows and Office may see slower growth. The gaming sector's performance could swing either way depending on how well cloud gaming is accepted. After crunching the numbers, a 1-year price target of $286 per share for MSFT has been suggested, banking on a moderate growth outlook and assuming the company can manage its costs well.
MARKET UPDATES
10/27/20234 min read
In Q3 2023, Microsoft exhibited a robust financial performance underscored by a rise in revenues and significant strides in its cloud segment. Here's a detailed summary of the major financial highlights:
Revenues:
Operating Income:
The operating income saw a 10% increase, amounting to $22.4 billion1.
Net Income:
Net income for this quarter was reported at $18.3 billion, a 9% increase1.
Earnings Per Share (EPS):
Microsoft Cloud Revenue:
There was notable growth in the cloud segment with revenues hitting $28.5 billion, up by 22% year-over-year1.
Productivity and Business Processes Revenue:
Revenue in this segment was $17.5 billion, up by 11% with Office Commercial products and cloud services revenue increasing by 13%, and Dynamics products and cloud services revenue increasing by 17%1.
Intelligent Cloud Revenue:
The revenue in the Intelligent Cloud segment was $22.1 billion, an increase of 16%, driven by a 17% increase in server products and cloud services revenue1.
More Personal Computing Revenue:
This segment saw a revenue of $13.3 billion, albeit with a decrease of 9%. Within this segment, Windows OEM revenue decreased by 28%, but Windows Commercial products and cloud services revenue increased by 14%1.
Shareholder Returns:
Microsoft returned $9.7 billion to shareholders in the form of share repurchases and dividends during this quarter
The financials depict a company in a strong position, particularly in cloud services and productivity business processes. The increasing revenues in these segments indicate a positive response to Microsoft's offerings in a highly competitive market. However, the decrease in the More Personal Computing segment, especially the Windows OEM revenue, is a point of concern, indicating challenges in some traditional stronghold areas for Microsoft.
Re-Evaluating Microsoft's Growth Outlook
Between 2020 and 2022, Microsoft (MSFT) saw a business boom, largely fueled by the unique demand created by the pandemic. However, the financial numbers in 2023 didn't live up to the previous highs. This has led to a more cautious outlook on how fast the company might grow in the near future.
Looking at Windows, there's been a noticeable dip in market share from the dominating 90% in the 1990s to 31% in September 2023. Though desktop computers saw a 7% growth, Windows lost ground, seeing its market share on desktops drop from 75% to 68% within a year. Meanwhile, alternatives like OS X and ChromeOS gained a little, showing that the competition is heating up, especially with the rise of tablets and smartphones.
While the pandemic brought a temporary boost to PC sales, and hence Windows, the trend didn't stick around. The shift towards other operating systems and devices seems to be a long-term change.
When it comes to Microsoft's Office suite, it appears the rapid growth phase has plateaued. Google's Workspace is now gaining traction by offering similar features but with an easier user interface and a free basic version. The market share numbers are tilting in favor of Workspace, and it seems like smaller companies, academics, and individual consumers are finding it more appealing due to its cost and user-friendliness.
LinkedIn continues to play a crucial role in connecting job seekers with employers, especially in Middle America. It's also seeing a growth in subscribers from India. However, its premium subscription seems less enticing now as people are not finding enough value in some of its features.
On the gaming front, Microsoft's acquisition of ATVI has brought popular gaming titles under its belt, setting the stage for some competition with Sony's gaming franchise. This move could potentially drive growth for Xbox, especially with the additional titles and the growing GamePass subscriptions.
Azure, Microsoft's cloud platform, continues to be a strong player in the rapidly growing cloud computing market. The push towards Artificial Intelligence (AI) has given a fresh boost to cloud services. Microsoft has a solid position here but faces stiff competition from Amazon's AWS and Google Cloud.
The integration of AI across Microsoft’s platforms is an exciting move, but again, the competition is fierce. Google and Amazon are not far behind in leveraging AI for enhancing their own cloud services and productivity tools.
Financially, 2023 was a bit of a letdown with lower net income and operating cash flows compared to the previous year, despite a slight increase in revenue. The costs related to investing in Azure and AI, among other things, ate into the profits.
Looking ahead, it's believed that Azure and AI will be the key growth drivers for Microsoft, while traditional cash cows like Windows and Office may see slower growth. The gaming sector's performance could swing either way depending on how well cloud gaming is accepted.
After crunching the numbers, a 1-year price target of $286 per share for MSFT has been suggested, banking on a moderate growth outlook and assuming the company can manage its costs well.
Lastly, rumors about Microsoft possibly taking over Open.AI are floating around. This could be a double-edged sword. While it might bring innovative AI tech under Microsoft's roof, there are concerns that Microsoft’s corporate approach could stifle the creative spirit at Open.AI.
All in all, Microsoft’s journey ahead seems to be a mix of promising opportunities and challenges that need careful navigation.
