Microsoft earnings preview: can it be the king of the next tech wave?

Microsoft Earnings Date

Microsoft (MSFT) will report its third fiscal quarter (Q3) 2023 results on April 25 after the market closes. The report will cover the quarter from January 2023 to March 2023.

Microsoft Earnings Expectation

Revenues: $51.05 billion. 4% year-over-year growth but 4% lower than the previous quarter.
EPS: $2.23, no change from a year ago and 3.8% lower than Q2.

Microsoft Earnings Key Watch

The shining star

Out of the three business divisions, the Intelligent Cloud department has become Microsoft’s gold mine nowadays, contributing 40% of the group’s total revenue with sound and solid growth momentum. In the previous quarter, the cloud services’ revenue increased 18% while whole group’s revenue only added 2%.

For the to-be-reported quarterly earnings, Microsoft anticipated revenues from the Intelligent Cloud will keep increasing at the pace between 17% and 19% to a range of $21.7-$22 billion. However, Microsoft also flagged that Azure, the cloud computing platform that which is one of the main engines of the cloud business, would slow down its growing speed by 4 or 5 percentage points to near 30% in the fiscal third quarter, down from 46% in the same period last year.

Q2 FY23 Financial Summary:

The laggard

The downtrend in the global personal computing industry has accelerated in the past year. So did Microsoft’s PC business. In the six months ended December 31th, the revenue from the PC related business was down 11% YOY, while in the last three month, the yearly downfall rate was speed up to 19%.

The first quarter of this year has marked the fifth consecutive quarter of global PC sales decline. As such, it's not difficult to see that this hard-to-stop slide will further falter the demand for all the product line under the umbrella of Personal Computing. The used-to-be-proud King of the PC projected this sector's revenue for Q3 will be between $11.9 billion and $12.3 billion, indicating a 14%-17% decline from the same quarter last year.

The AI Race

The battlefield for the AI race has been set up and the smoke is getting intense.

Microsoft seemly led the way for now thanks to its shared commitment with OpenAI to build generative AI systems--ChatGPT has convinced the world in 2023 that, AI will become a topping layer of technology and prompt a new generation of “platform shift”.

Clearly, all the tech giants are not hesitated to go all-in in the AI race and are ready to thrive in this new age. Microsoft, despite racing inches ahead now, is facing the fiercest competition in decades. Alphabet, Google’s parent company, unveiled a similar AI function in March for Gmail, which is now used by 1.8 billion people around the world. Apple disclosed that 45% of its M&A targets are AI-related compared to Microsoft’s 23% now. In terms of the bright minds, Meta has employed 23.5% of staff with AI skills while Microsoft’s ratio is 21.8%

Additionally, the ticket to the AI race is very costly. Microsoft has boosted its R&D investment in the previous quarter by 18% to 6.8 billion, which, saw its net margin fell from 36% to 30% in the September quarter.

As Chairman and CEO of Microsoft Satya Nadella said in January: “The next major wave of computing is being born.” Microsoft is not shy with its ambition to be the king of the new wave, the challenge being, all its old foes are thinking the same.

Microsoft Share Price

Despite the bright limelight this year thanks to ChatGPT, Microsoft’s stock price didn’t enjoy extra shine compared to other tech titans. But the good news is the price has clearly bottomed out from the Nov-Jan low when the two-year-low was made.

Based on the weekly chat, the stock is currently attempting to challenge the August peak at around 291-296, a hurdle that could open the door to $300 psychological level if successfully conquered.

Conversely, if the break fails, any pullback should be supported by the 100-MA to preserve the bull-biased momentum. However, a fall below this level will risk further breaching the current ascending trajectory and increase the chance of a bear-reversal.

IG sentiment suggested that, by the end of April 21st, 79% of IG clients hold long positions of Microsoft.

Source: IG