Enterprise software and cloud giant Microsoft (MSFT) is scheduled to report second quarter fiscal 2023 earnings results after the closing bell Tuesday. The shares are down roughly 33% from their peak, and investors want to know whether now is an opportunity to jump in.
While the market remains broadly positive on Microsoft, the company’s recent layoff announcement is the latest acknowledgment by the company that its earnings are slowing down, and also, more broadly, that a recession may be imminent. On Wednesday Microsoft said it would reduce its global headcount by 10,000 employees and take a $1.2 billion charge related to the job cuts in its fiscal second quarter, impacting earnings by 12 cents per share.
“It’s important to note that while we are eliminating roles in some areas, we will continue to hire in key strategic areas,” said CEO Satya Nadella in a letter to employees. With concerns about rising inflation, rising interest rates and slower tech spending, the software giant suffered an almost 30% decline in 2022. However, the company’s fast-growing Azure cloud platform and the Intelligent Cloud business remains the cornerstones to the business and its long-term success. Azure and cloud services revenues are growing north of 40% year over year, while profit margin is close to 45%.
These growth trends are expected to continue into 2023. Even when factoring tech spending headwinds, Microsoft carries a strong balance sheet, with roughly $100 billion in cash reserves and another $75 billion in annual operating cash flow. As to whether the stock has bottomed? That remains to be seen. But on Tuesday, the company’s guidance will gauge how confident the management feels about its growth potential and the company’s ability to navigate through margin headwinds will be key to the near-term stock performance.
For the quarter that ended December, the Redmond, Wash.-based tech giant is expected to earn $2.30 per share on revenue of $52.99 billion. This compares to the year-ago quarter when earning were $2.48 per share on $51.73 billion in revenue. For the full year, ending June, earnings are projected to rise 3.9% year over year to $9.59 per share, while full-year revenue of $212.84 billion would mark a year-over-year increase of 7.3%.
The bull case for Microsoft spans multiple tiers. Most recently, the company’s advances into the realm of artificial intelligence with ChatGPT by way of its $10 billion investment in Open AI. This is being referred to an “iPhone moment” by several analysts. Terms of the deal suggests Microsoft will get a 75% share of OpenAI’s profits. That large shares of profits protects the investment after which Microsoft would assume a 49% stake in OpenAI.
Why is Microsoft making this deal? Consider, ChatGPT generates text automatically, using written prompts in a way that appears significantly more advanced than the typical chatbots seen on web pages. Advances in this area could potentially Microsoft boost its efforts in web search, allowing it to better compete with Google (GOOG , GOOGL). Another area to be bullish on Microsoft is the growth expected in the company main business segments.
In the first quarter, the Intelligent Cloud segment, which includes Microsoft Azure, accounted for 40% of total revenue. Just as impressive, the segment generated operating income of 44.2% which is remarkable given the overall size of the company. With the global cloud computing market projected to grow to $1.2 trillion in the next four year, there is still a massive opportunity for Microsoft to grow. As such, until there is a noticeable decline in performance and execution, Microsoft remains a stock to own for the next 12 to 18 months.
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