Microsoft(NASDAQ:MSFT) is a company that attracts a lot of attention during earnings season. Since it’s one of the largest and most influential technology companies in the world, its earnings can tell us not only about its business, but also about broader tech trends.
Unfortunately, this latest earnings report tells two different stories for Microsoft. On the one hand, it has delivered impressive financial results. On the other hand, the less optimistic outlook caused its stock price to drop nearly 10% on January 28, one of the largest same-day losses in the company’s history.
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Plunging stock price aside, here are five key takeaways from Microsoft’s latest earnings report.
Image source: Getty Images.
For Microsoft, making money has never really been an issue. It’s a real cash cow that often exceeds expectations. The latest quarter was no exception. Microsoft’s revenue was US$81.3 billion, a year-on-year increase of 17%, nearly US$1 billion higher than expected. Its earnings per share (EPS) were $4.14, up 24% and $0.22 above expectations. Its net profit grew the fastest, up 60% to $38.5 billion.
Margins fell slightly due to higher expenses, but cash flow continued. Xbox Content and Services was its only business segment to post negative growth last quarter (down 5%).
Microsoft’s backlog (future contract revenue) currently stands at $625 billion. This is usually a good thing, but the problem for Microsoft is that its $281 billion backlog comes from OpenAI, the creator of ChatGPT.
If everything goes according to plan, then perfect. However, if OpenAI is unable to fulfill its contract for whatever reason, Microsoft will lose a significant portion of its guaranteed future revenue. The indications are not that this is the case, but if predicting the future of business were easy, many of us would avoid foreseeable problems.
Cloud services are unlike social media, where you can add almost any number of customers without giving them more physical space. To attract new Azure customers, Microsoft must ensure it has the computing power to host and support everything these companies need.
Unfortunately, demand currently exceeds available capacity, which is part of the reason its backlog is so high. This isn’t the most serious problem, but it may slow Azure’s growth a bit.
That said, its revenue grew 39% last quarter. Even if its growth slows down, which seems likely, that still leaves impressive room for growth, especially given its size.
In its most recent quarter, Microsoft spent $37.5 billion on capital expenditures (capex), which itself isn’t a big deal compared to other big tech companies. What’s worth noting, though, is what this spending was used for.
Microsoft is investing heavily in building its artificial intelligence (AI) infrastructure, including data centers, graphics processing units (GPUs) and central processing units (CPUs). The problem with investing heavily in GPUs and CPUs is that they quickly become obsolete as newer, more advanced versions become available. If Microsoft wants to stay ahead of the competition, it needs to keep up with the latest AI hardware.
As of the close on January 31, Microsoft’s stock price was about 27 times earnings. That’s the lowest among the “Big Seven” stocks and well below the average of about 33.4 over the past five years.
MSFT price-to-earnings ratio data is provided by YCharts. PE ratio = price-to-earnings ratio.
No one can say with 100 percent certainty whether Microsoft’s stock will continue to fall, but one thing is clear: The price is more attractive now than it was before the decline. At the beginning of this year, the company’s price-to-earnings ratio exceeded 30 times. This drop alone doesn’t make Microsoft a stock worth buying, but it currently offers far more upside potential than downside.
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Stefon Walters works at Microsoft. The Motley Fool has positions and recommendations for Microsoft. The Motley Fool has a disclosure policy.
5 takeaways from Microsoft’s latest earnings report Originally published by The Motley Fool
