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Quick Thoughts on Microsoft Q4 2022 Results $MSFT

Calvin Lo

Microsoft (MSFT) results for Q4 2022 (FY23 Q2) released on 24th Jan 2023. MSFT stock jumped ~5% initially after results release but reversed down ~3% after management offered weak guidance on the conference call. On the bright side, MSFT managed to end the week up ~3% helped along by a rally in the broader market.

Results summary

  • Revenue $52.7B, +2% yoy
  • Operating income $20.4B, -8% yoy (GAAP) and $21.6B, -3% yoy (non-GAAP)
  • Net income $16.4B, -12% yoy (GAAP) and $17.4B, -7% yoy (non-GAAP)
  • Diluted EPS $2.20, -11% yoy (GAAP) and $2.32, -6% yoy (non-GAAP)
Source: Microsoft.com

Business segments

  • Productivity and Business Processes – Office/Microsoft/Dynamics 365, LinkedIn – revenue $17B, +7% yoy (+13% CC)
  • Intelligent Cloud – Azure – revenue $21.5B, +18% yoy (+24% CC)
  • More Personal Computing – Windows OEM, Windows Commercial, Gaming (Xbox), Search and news ads, Devices – revenue $14.2B, -19% yoy (-16% CC)

Note: CC = constant currency

Key highlights

  • Forex effects negative (reporting in constant currency) impact up to 7%
  • Microsoft Cloud revenue $27.1B, +22% yoy (+29% CC); Azure +31% yoy (+38% CC)
  • Management focus on Cloud and AI as the next major wave of computing
  • Returned $9.7B to shareholders in buybacks and dividends in FY23 Q2, -11% yoy

Catalysts to watch

  • Investment into OpenAI, creator of ChatGPT – how Microsoft can monetize
  • Acquisition of Activision Blizzard (ATVI) facing antitrust scrutiny – whether deal goes through
  • US dollar weakness – whether headwind will ease next quarter

My thoughts

Microsoft management has clearly articulated their focus on Cloud and AI as the future growth areas of the company. Enterprise productivity tools are an important cash cow and continues to grow, but PC and hardware are clearly on the decline.

Outside of Cloud and AI, Microsoft is also trying to revive gaming by buying Activision Blizzard. Hopefully that deal goes through (still facing opposition from US FTC), otherwise I’m not optimistic about Microsoft’s gaming potential. ATVI performed pretty well in last quarter’s results, but Microsoft is probably still slightly overpaying at $69B offer vs $60B current market cap.

Investment into ChatGPT creator OpenAI might be a game-changer. AI can potentially be implemented into so many facets of Microsoft’s business, and has synergies with the Cloud in terms of computing power, cost and efficiency. I believe Microsoft will figure out how to unlock the potential of AI.

The company I work at uses many of Microsoft’s products (Office 365, Dynamics, Teams, Azure, PowerBI), so I get to see and use some of their products first hand which helps me to build conviction in the company.

MSFT stock is trading at ~27x PE TTM, which is lower than the 5Y avg of ~40x but higher than S&P 500 PE of ~22x.

Source: Tiger Trade

I’m still bullish on Microsoft, and believe that the company is heading in the right direction with Cloud and AI, although I’m less optimistic about the gaming acquisition of ATVI. However, I’m not rushing to add to my position, since shares are still not as cheap as other tech names (MSFT of course demands a premium). Also, I have pretty substantial exposure to MSFT through index funds already, since it is usually one of the top holdings. For now, I’m happy to just hold onto the shares I have and look for opportunities to buy at lower prices.

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