- Microsoft revenue growth hits six-year low
- Making big bets on artificial intelligence
- Stock has returned 157% over five years
That Microsoft’s (MSFT:NASDAQ) second quarter growth slowed across the board will seem alien to many investors that have come to rely on one of the world’s cloud computing powerhouses and more durable names in the technology sector sell-off over the last year or so.
Microsoft’s latest trading update delivered better earnings than expected ($2.32 versus $2.30) but a six-year low for revenue growth (2%). The slowdown, and conservative tone of commentary, points towards a deceleration that could drag on longer than optimists had hoped.
‘For all the shiny bells and whistles surrounding the likes of Google-owner Alphabet (GOOG:NASDAQ), Amazon (AMZN:NASDAQ) and Microsoft it is cloud computing which has been a real engine of growth,’ said Russ Mould, investment director at investment platform AJ Bell.
‘If these cloud businesses start to sputter, more attention will be focused on issues facing Microsoft’s PC software arm, Amazon’s e-commerce division and Alphabet’s softer digital advertising revenue.’
MICROSOFT HURTING
Chief financial officer Amy Hood said a slowdown across commercial lines seen in December would continue into 2023, not what investors want to hear, but nor is it surprising given the constant state of flux that the global economy has been mired in for months.
‘The PC and advertising markets continue to be weak as macroeconomic concerns continue to weigh on sentiment,’ said Ben Barringer, equity research analyst at Quilter Cheviot. ‘With recession in the US still uncertain, the path Microsoft takes from here will similarly be clouded.’
This partly explains recent investments in the likes of ChatGPT, the artificial intelligence-powered search engine and chatbot developed by OpenAI. The partnership runs deep, with Microsoft stumping up $10 billion to build ChatGPT into its Azure Cloud business to allow developers access to the best AI tools and infrastructure around, as well as helping OpenAI with future R&D projects.
WHAT WILL HELP SENTIMENT
The backcloth may seem bleak now, yet investors would do well to recall that Microsoft has been through the economic wringer several times in the past and has come through stronger. A glance at a longer-run share price chart tells a powerful story.
Microsoft’s share price has lost about 30% since October 2021, yet if you held the stock over the past five years, you’d still be 157% up. Pre-market indicators point to a 2% share price decline when Wall Street reopens later today at $242.04.
‘Despite the weak outlook, we do believe a significant level of conservatism has been built into guidance and we are disappointed not to see strong expectations for future earnings,’ said Quilter Cheviot’s Barringer.
‘Things are tough, but energy costs are improving, the dollar has weakened, which will help overseas earnings, and the headcount reduction will begin to take effect and help bottom lines. As a result, while the first half of the year may be tricky, we see an improving picture for Microsoft,’ the analyst said.
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (Steven Frazer) and the editor (Tom Sieber) own shares in AJ Bell.
