Microsoft (MSFT) Q4 Earnings Analysis | Time To Buy MSFT Right Now?

Wall Street and Investors' Relief After Microsoft's Earnings Report

In this section, the transcript discusses the relief felt by Wall Street and investors after Microsoft reported their earnings. The updates on guidance provided by Microsoft also have implications for other companies in the stock market.

Microsoft's Earnings Report and Guidance Updates

• Microsoft reported their Q4 earnings, with revenues of $51.87 billion, representing a 12% growth rate year over year.

• The revenue missed expectations by about $490 million, and they also fell short on earnings per share.

• However, upon closer examination of the earnings report, investors started to digest the news and the stock began to rise in after-hours trading.

• Microsoft provided guidance for the upcoming quarter, with expected high-end figures of $14.75 billion for productivity, $6.16-6.65 billion for cloud business, and $12.8 billion for personal computing.

• This positive guidance from Microsoft led to an increase in stock prices not only for Microsoft but also for other companies like Google, Amazon, and Meta.

Outlook on Q4 and Beyond

This section focuses on the outlook for Q4 and beyond based on Microsoft's guidance. It highlights how investors are always looking ahead to future quarters and how confirmation of meeting or exceeding estimates can impact stock prices.

Positive Outlook from Microsoft

• Looking ahead to Q4 and beyond, investors are interested in at least meeting if not exceeding estimates.

• Confirmation from Microsoft that they expect around 13% growth year over year in the upcoming quarter has boosted investor confidence.

• This positive outlook from Microsoft has had a ripple effect on other companies like Google, Meta (formerly Facebook), Amazon, etc., as it confirms that things are not as bad as initially feared.

• Microsoft's CEO, Satya Nadella, emphasized the company's commitment to investing and taking market share during economic uncertainty, which has been well-received by investors.

Investing and Thriving Amid Economic Uncertainty

This section highlights the importance of investing and taking market share during economic uncertainty. It emphasizes how Microsoft's approach sets them apart from others who focus solely on cost-cutting.

Microsoft's Strategic Approach

• Satya Nadella's statement about investing to take market share during economic uncertainty is applauded by investors.

• While many companies focus on cutting costs and surviving during a recession, Microsoft's strategy involves investing their substantial resources to thrive and outperform competitors.

• This approach positions Microsoft favorably in the market, especially if there is a deep recession or an extended period of higher interest rates.

• The strength of Microsoft compared to its competition is evident in their stock performance, even though they may have experienced some downward movement in recent times.

Mid-Term Growth Expectations

This section discusses the mid-term growth expectations for various companies, including Google, Meta (formerly Facebook), Amazon, etc., as Wall Street adjusts earnings estimates based on current economic conditions.

Adjusted Earnings Estimates

• Wall Street has adjusted earnings estimates for several companies to a mid-teens growth rate for the next few quarters.

• Companies like Google, Meta (formerly Facebook), Amazon are expected to experience revenue and earnings pressure due to factors such as a strong dollar and global economic conditions.

• However, it is important to note that foreign exchange fluctuations can change direction over time and eventually become a tailwind for these companies.

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New Section

This section discusses the factors impacting Microsoft's business and stock performance, including foreign exchange headwinds and other one-time events.

Factors Affecting Performance

• Microsoft experienced several one-time impacts in this quarter, totaling approximately $1 billion, which are not directly related to supply and demand or the company's core business.

• LinkedIn showed a 26% increase in performance, while Office 365 commercial and Office commercial products saw growth of 15% and nearly double digits respectively.

• Azure demonstrated a 40% year-over-year growth, with constant currency factored in at 46%.

• Xbox faced challenges due to a pull forward in demand for video games during the pandemic.

• Windows OEM revenue was impacted by shutdowns in China and other China-related factors.

• Advertising spend reductions had an impact of around $100 million.

• Restructuring efforts resulted in employee severance costs.

New Section

This section delves into specific financial impacts on Microsoft's earnings due to various factors such as foreign exchange rates, shutdowns in China, advertising spend reductions, geopolitical conflicts, and restructuring costs.

Financial Impacts

• Foreign exchange had a significant impact of $595 million on Microsoft's earnings for the quarter.

• Shutdowns in China led to a $300 million decrease in Windows OEM revenue.

• Reductions in advertising spend resulted in an impact of approximately $100 million.

• Geopolitical conflicts caused a $126 million related impact on earnings.

• Restructuring efforts incurred employee severance costs.

New Section

This section provides insights into how employee layoffs and restructuring affect companies like Microsoft from a financial perspective.

Employee Layoffs and Restructuring

• When companies lay off employees, they incur expenses such as severance pay and stock options, which impact their financials for the next one to two quarters.

• The costs associated with employee severance are significant and may not immediately result in cost reductions.

New Section

This section focuses on Microsoft's revenue performance over the past 12 months and highlights its position as a major player in the industry.

Revenue Performance

• Microsoft generated $51.8 billion in total revenues, demonstrating growth compared to the previous year's $46.1 billion.

• The upcoming quarter's guidance suggests that Microsoft will continue to perform well within this range, considering various headwinds mentioned earlier.

• Microsoft's revenue of nearly $200 billion over the past 12 months showcases its strength and market dominance.

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Understanding Gross Margin vs Gross Profit

The speaker discusses the difference between gross margin and gross profit in relation to Adobe's financials.

Gross Margin vs Gross Profit

• Adobe's revenue was $51.9 billion, while their costs were $16.4 billion, resulting in a gross margin.

• The speaker notes that they usually think of margin as a percentage and refers to it as gross profit.

• In a quarter, Adobe had a gross profit of $35.4 billion, which allows them flexibility for research and development, sales and marketing, and general administrative expenses.

Increase in Expenses for Research & Development, Sales & Marketing

The speaker highlights the increase in expenses for research and development (R&D), sales and marketing at Adobe.

Increase in Expenses

• R&D expenses increased from approximately $5.7 billion to about $6.8 billion.

• Sales and marketing expenses also increased from $5.8 billion to $6.3 billion.

• General administrative expenses remained relatively flat year over year.

Impressive Operating Income of Adobe

The speaker emphasizes the impressive operating income of Adobe.

Operating Income

• In Q4, after paying all salaries, Adobe earned an operating income of $20.5 billion from their revenue of $51.9 billion.

• Over the past 12 months, Adobe generated an operating income of $83 billion.

• Despite paying interest on debt and income taxes amounting to nearly $11 billion, their net income for the full year was an impressive $72 billion.

Microsoft's Financial Performance

The speaker discusses Microsoft's financial performance and its stability in the market.

Financial Performance

• Microsoft's net income marginally increased from $16.5 billion to $16.7 billion year over year.

• The speaker suggests that even if there is a recession or a strong dollar, Microsoft's financial position remains strong.

• The company has made strategic investments, such as the pending acquisition of video game maker Activision Blizzard for $69 billion.

• Microsoft is actively reducing its cash reserves, which currently stand at $104 billion.

Microsoft's Cash Management and Debt

The speaker praises Microsoft's approach to cash management and debt reduction.

Cash Management and Debt

• Despite being in an inflationary environment, Microsoft has been utilizing its cash reserves rather than keeping them idle.

• They have a pending deal with Activision Blizzard that requires writing a check for $70 billion.

• The speaker commends Microsoft for being aggressive in reducing their cash reserves.

• Long-term debt has also been reduced to $47 billion.

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Understanding the Balance Sheet and Cash Flows

The speaker discusses the balance sheet and cash flows of a company, specifically focusing on Microsoft.

Analyzing the Balance Sheet and Cash Flows

• Subtracting $70 billion from the balance sheet would have a significant impact, but it is not a cause for concern as there are sufficient cash flows to support it.

• Net income in the most recent quarter shows positive growth year over year, which is a promising sign for the company.

• Positive cash flows of $24 billion were generated from net cash from operations on $16.7 billion worth of revenue in the most recent quarter.

• Despite spending $69 billion on acquiring a video game maker, Microsoft's positive cash flow of $89 billion provides reassurance even if some amount is subtracted from it.

• Even if net income and cash flows decrease in the future, Microsoft's astronomical numbers put them in a strong position compared to other companies.

Financial Management by Microsoft

• In the most recent quarter, Microsoft repurchased common stock worth $8.7 billion and paid dividends of $4.6 billion to shareholders, demonstrating their commitment to rewarding shareholders.

• Microsoft has been making significant investments through acquisitions, with $63 billion spent last year and $26 billion this year. They also made an acquisition deal worth around $19 or 20 billion dollars recently.

• Despite these investments, Microsoft's positive cash flow remains high due to their effective financial management strategies. The CFO of Microsoft is praised for doing an excellent job in managing finances aggressively in the current environment.

Technical Analysis of Microsoft Stock

The speaker provides insights into the technical analysis of Microsoft stock and its recent price movements.

Recent Price Movements

• Over the past year, Microsoft stock has been in a downward channel. In the last few months, many tech stocks, including Microsoft, have started to flatten out.

• The majority of the time over the last 90 days, Microsoft stock has been trading around $250 with an upside potential of around $270. A breakout above this range would be significant.

• To see a significant change in the uptrend, Microsoft stock would need to break above $270-$280. However, if it reaches that level, it may become overbought in the shorter term and experience pullbacks.

• While there is no major movement currently, closely monitoring Microsoft's stock for any breakout or pullback opportunities is recommended.

New Section

In this section, the speaker discusses the current situation with Microsoft stock and provides insights on whether to sell or wait to buy.

Evaluating Selling Opportunities

• The speaker suggests considering selling Microsoft shares at the current price of $263.

• They mention that everyone's situation is different, so individual decisions may vary.

• The speaker personally thinks about starting to sell and recommends using a trailing stop if the stock continues to rally.

• They highlight that since November, there has been a consistent pattern of selling opportunities with Microsoft stock.

• It either goes up a little and then crashes down or immediately reverses near a green trend line.

Support Levels and Short-Term Outlook

• The speaker acknowledges that they cannot predict future outcomes but emphasizes that historically, there has been a 100% probability of selling Microsoft since November.

• They suggest that if one decides to sell, there should be some area of support close underneath.

• In the shorter term, Microsoft has shown positive signs with higher sets of lows in June, July, and recently.

• The speaker closely watches this area as it indicates potential for a shorter-term uptrend if the bounce continues.

Technical Perspective and Buying Opportunities

• From a technical perspective based on the last six to eight months of data, the speaker advises selling Microsoft shares.

• However, they also mention that there is potential for reversal at these areas, which could excite investors.

• If there is no change in the pattern, a rejection at this area could lead to a pullback south of about $240 per share.

• This would present buying opportunities within the sideways consolidation phase maintained by Microsoft stock.

Conclusion

The speaker concludes by stating that their analysis is based on technical indicators from the chart. While suggesting selling from a technical perspective, they also acknowledge potential reversals. They express confidence in holding their Microsoft shares and mention the possibility of buying more if there is a market pullback.

New Section

In this section, the speaker reiterates their technical analysis of Microsoft stock and discusses potential buying opportunities.

Reversal Potential and Market Conditions

• The speaker emphasizes that the chart indicates both selling and potential reversals at certain areas.

• They express confidence in not selling any of their Microsoft shares.

• If there is weakness in the markets or a pullback in stocks due to overbought conditions, it would not surprise them.

• A pullback to either the bottom of the uptrend or around $245 per share could present an opportunity to buy more Microsoft stock.

Sideways Consolidation and Positive Outlook

• The speaker mentions that Microsoft's sideways consolidation phase is supported by earnings estimates and positive guidance from the company.

• They clarify that their technical perspective is based on what the chart indicates, highlighting both selling opportunities and potential reversals.

Conclusion

The speaker concludes by stating that they hope viewers enjoyed the video. They reiterate their technical analysis approach, emphasizing that while they suggest selling from a technical perspective, there are also indications of potential reversals. They express confidence in holding their Microsoft shares and discuss possible buying opportunities during market pullbacks.