Microsoft - Is there any limit to growth?

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Founded in 1975 by Bill Gates and Paul Allen, Microsoft rose to become the world’s leading software developer with the Windows operating system and Office applications. Over the decades, the global giant has also expanded its operations into cloud services, the gaming industry, artificial intelligence, and smart devices.

History

Microsoft went public in 1986, and its stock has since risen a staggering +424,490%, which is approximately three times more than the return produced by Apple, which has been listed for nearly the same amount of time. At the time of writing, Microsoft is the world’s most valuable company with a market capitalization of $3.154 trillion. Long-term shareholders have been generously rewarded.

A significant turning point in Microsoft’s story over the last decade occurred in 2014, when the company began investing full steam ahead into cloud services under the leadership of CEO Satya Nadella. Launched that same year, Microsoft Azure is a public cloud service that can be used as a platform for virtual servers and as a development platform for developers. Azure also offers various ready-to-use cloud service components, such as for mobile device management (Microsoft Intune), document protection (Azure Rights Management Service), large data mass analysis (Big Data), and machine learning (Azure Machine Learning). In addition, Azure serves as the platform for many of Microsoft’s own cloud applications, such as Dynamics CRM Online.

Cloud Services and Artificial Intelligence

Amazon, known as the market leader in cloud services, has found a serious challenger in Microsoft. The third-largest player in this field is Google Cloud. Currently, Amazon’s (AWS) share of the cloud services market is 31%, while Microsoft’s share as the market runner-up is 24%. Together, the top three account for a whopping 67% of the entire market.

However, the latest growth driver can be found in artificial intelligence, as in January 2023, Microsoft acquired a 49% stake in OpenAI. OpenAI was co-founded in 2015 by Sam Altman and Elon Musk, among others, with the goal of open AI development, as there were fears that Google and Facebook would monopolize AI development.

Today, the Intelligent Cloud segment is a very significant source of income for the company (42% of revenue), achieving +19% YoY growth last year. Within the segment, revenue from Azure and other cloud services in particular grew by +28% compared to a year ago.

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Utilizing AI in the product offering has brought a positive tone to the future outlook, as AI-leveraging Azure, for example, has succeeded in winning market share. The company also has a good foundation for improving the productivity of its other tools (e.g., Microsoft Copilot) through AI.

Valuation

Currently, Microsoft’s stock trades at a forward P/E of 35x, which is a high figure, but so is the Nasdaq index’s P/E of 31x. At the time of writing, the price is hovering around $425, and if the company reaches the earnings per share (EPS) of $15.65 predicted by analysts for 2026 and is still valued at 35x P/E at that time, the price could be $550, which is 30% higher than current levels. Therefore, it is difficult to consider the stock particularly cheap unless one believes in significantly stronger earnings growth.

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Microsoft will report its Q3’24 results on Thursday after the market close, with expectations of growth compared to the prior-year period (+14%), but a slight decrease (-1.9%) from the previous quarter.

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Currently, consensus expects:

  • Revenue: $60.86 billion
  • EBIT: $20.27 billion
  • Operating margin: 43.16%
  • Net margin: 34.51%
  • EPS: $2.828

So, some slight fluctuation between quarters, but in the big picture, the train keeps chugging northeast. :flexed_biceps:t2:

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Go ahead and listen to the latest episode of Acquired.

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Microsoft’s revenue this quarter exceeded expectations, growing 17 percent to $61.9 billion.

The company benefited from the increasing use of artificial intelligence in its cloud services and applications. Revenue for the Intelligent Cloud unit, which includes Azure, rose to $26.7 billion, and Azure revenue alone grew by 31%. The Copilot tool and the recovery in PC sales supported growth in enterprise software and the Windows business.

https://www.reuters.com/technology/microsoft-beats-quarterly-revenue-estimates-2024-04-25/

https://twitter.com/ConsensusGurus/status/1783588987665330315/photo/1
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EDIT:

https://twitter.com/Quartr_App/status/1783589749304824246

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Sijoittaja.fi has written a quick read on Microsoft’s results. :slight_smile:

According to CFO Amy Hood’s guidance, Microsoft expects revenue of $64 billion for the fiscal fourth quarter, which is slightly below the consensus forecast of $64.5 billion. Hood projected an operating margin of 42.3%, which is ahead of StreetAccount’s consensus of 41.5%.

”At present, near-term AI demand is slightly higher than our available capacity,” Hood said. Microsoft has increased capital expenditures to acquire Nvidia graphics processing units (GPUs) for training and running AI models.

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Interesting tweet related to Microsoft (+Google) and AI. :slight_smile:

https://twitter.com/StockMKTNewz/status/1785501882410258627

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Here is a Kauppalehti article on Microsoft and AI that takes a couple of minutes to read. The article is not behind a paywall. :slight_smile:

The development of MAI-1 is led by former Google AI chief and CEO of the AI startup Inflection (acquired by Microsoft), Mustafa Suleyman, Ars Technica reports. Techniques developed by Inflection’s personnel may be utilized in building MAI-1, but according to two Microsoft employees, it is a completely new large language model.

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This article discusses an investment that isn’t particularly massive on Microsoft’s scale relative to its market cap: a 4 billion investment vs a market cap of over 3,000 billion. With this money, it is investing in data centers in France. No paywall.

Amazon is also making investments of over a billion in France.

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Microsoft plans to offer AMD AI chips to compete against Nvidia components.

Azure cloud service will sell AMD’s MI300X chips as an alternative to Nvidia’s H100 chips. At the Build conference, the new Cobalt 100 processors will be presented, offering 40% better performance than other processors based on Arm Holdings’ technology. Cobalt chips compete with Amazon’s Graviton processors and are being tested to power/support Microsoft Teams.

https://www.reuters.com/technology/microsoft-offers-cloud-customers-amd-alternative-nvidia-ai-processors-2024-05-17/

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I came across this news today.

The 2020s have been a triumph for processors based on Arm technology. All iPhones and practically all Android phones use Arm processor technology, and since Apple transitioned from Intel processors to its own M-series processors, Macs have also made the leap into Arm’s gentle embrace. Now Microsoft wants to make the same transition for Windows computers.

At an event held yesterday, the company spoke about major reforms in the systems running under the hood of Windows. The most important and significant change for Windows is definitely that Microsoft has now designed the entire Windows 11 around Arm technology and AI. With the upcoming Windows 11 24H2 update, Arm-based PCs will run programs intended for x86/x64 processors up to 20 percent faster than before.

At the forefront of Arm machines will, of course, be laptops, where the change in architecture is most beneficial. Anyone who has used laptops based on Apple’s M-chips understands the benefits: battery life is insanely long, devices hardly warm up during use, and there is still a massive amount of performance available.

Microsoft calls Arm-based Windows machines that meet the criteria Copilot+ PCs, and according to the company, the battery life of laptops meeting the technical requirements would be 15 hours of web browsing, and they should wipe the floor with M3-based MacBook Airs in terms of performance.

This seems like an interesting counterpart to Apple’s technology, but it remains to be seen how it gains popularity in practice. However, all the prerequisites seem to be there. At least I’ve really grown to like the MacBook’s silence over the past year (even though at the office, Vepu’s laughs would drown out the hum of even a small jet engine anyway :grinning_face_with_smiling_eyes:) and the incredibly long battery life as a work machine.

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The presentation reminded me of Simon’s discussion about the difference between Microsoft and Apple when comparing battery life.
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https://www.youtube.com/watch?v=jEOftmUJ6a4

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OpenAI selected the Oracle Cloud Infrastructure platform in collaboration with Oracle and Microsoft.

The goal is to expand the Microsoft Azure AI platform to Oracle Cloud Infrastructure, increasing OpenAI’s compute capacity. The collaboration will likely offer new opportunities and growth for all parties, which could be beneficial for investors.

https://x.com/StockMKTNewz/status/1800620294110941208

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Here is a bit more about Oracle, since it was mentioned in the previous link. :slight_smile:

https://x.com/TheRayMyers/status/1800626927050387700/photo/1

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Here is a short and concise, yet fresh look at Microsoft. :slight_smile:

https://x.com/QCompounding/status/1802317339049763184

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Here is Salkunrakentaja’s article about Microsoft. Nothing too extraordinary, but quite an interesting piece. :slight_smile:

“Microsoft Copilot creates a new era for AI transformation and improves business results in all roles and across all industries,” Microsoft CEO Satya Nadella said in a statement.

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Hopefully Inderes does the same, with displacing Bloomberg as an intermediate step etc.

https://x.com/StockMKTNewz/status/1808587090646741074

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Where does Microsoft’s cash come from?

https://x.com/carbonfinancex/status/1784257708792701099

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WSJ Jul 06 2024

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  • The start of the artificial-intelligence arms race was all about going big: Giant models trained on mountains of data, attempting to mimic human-level intelligence.

Now, tech giants and startups are thinking smaller as they slim down AI software to make it cheaper, faster and more specialized.

This category of AI software—called small or medium language models—is trained on less data and often designed for specific tasks.

The largest models, like OpenAI’s GPT-4, cost more than $100 million to develop and use more than one trillion parameters, a measurement of their size. Smaller models are often trained on narrower data sets—just on legal issues, for example—and can cost less than $10 million to train, using fewer than 10 billion parameters. The smaller models also use less computing power, and thus cost less, to respond to each query.

Microsoft has played up its family of small models named Phi, which Chief Executive Satya Nadella said are 1/100th the size of the free model behind OpenAI’s ChatGPT and perform many tasks nearly as well.

“I think we increasingly believe it’s going to be a world of different models,” said Yusuf Mehdi, Microsoft’s chief commercial officer.

  • Microsoft was one of the first big tech companies to bet billions of dollars on generative AI, and the company quickly realized it was becoming more expensive to operate than the company had initially anticipated, Mehdi said.

The company also recently launched AI laptops that use dozens of AI models for search and image generation. The models require so little data that they can be run on a device and don’t require access to massive cloud-based supercomputers as ChatGPT does.

Google—as well as AI startups Mistral, Anthropic and Cohere—have also released smaller models this year. Apple unveiled its own AI road map in June with plans to use small models so that it could run the software entirely on phones to make it faster and more secure.

The move to smaller models comes as progress on publicly released large models is slowing. Since OpenAI last year released GPT 4, a significant advance in capabilities from the prior model GPT 3.5, no new models have been released that make an equivalent jump forward. Researchers attribute this to factors including a scarcity of high-quality, new data for training.

  • Companies aren’t giving up on large models, though. Apple announced it was incorporating ChatGPT into its Siri assistant to carry out more sophisticated tasks like composing emails. Microsoft said its newest version of Windows would integrate the most recent model from OpenAI.

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Johannes Ankelo has written an article about Microsoft from an AI perspective.

The article also contains some advertising. :slight_smile:

Business Insider, on the other hand, reports that one of the biggest complaints from Microsoft customers is that Copilot does not perform its tasks as well as OpenAI’s ChatGPT. Microsoft responded to the feedback by saying that customers are not using the new tools correctly and the company plans to produce videos in collaboration with its partner to help users give better prompts (commands) to the AI.

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https://x.com/financialjuice/status/1818376891696321022

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Microsoft’s stock takes a dive after earnings, even as earnings beat estimates

By Tomi Kilgore

Share

Shares of Microsoft Corp. sank 7.7% in Tuesday’s after-hours session, even after the software giant reported fiscal fourth-quarter profit and total revenue that beat expectations, as strength in services offset weakness in products.

For the quarter to June 30, net income rose to $22.04 billion, or $2.95 a share, from $20.08 billion, or $2.69 a share, in the same period a year ago. The FactSet consensus for earnings per share was $2.94.

Total revenue grew 15.2% to $64.73 billion, above the FactSet consensus of $64.38 billion, as product revenue fell 21.6% to $13.22 billion while service and other revenue jumped 30.9% to $51.51 billion.

The company said it will provide fiscal 2025 guidance in its post-earnings call with analysts, which is scheduled to begin at 5:30 p.m. Eastern.

The stock closed the regular session down 0.9%, and has shed 5.4% month to date.


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