Microsoft: Not Just Your Dad’s Tech Stock Anymore.

Update – January 6, 2024 – In late January 2024, Microsoft is anticipated to announce its financial results for the second quarter ending December 31, 2023. Despite expectations of a challenged enterprise market due to economic factors and potential year-over-year revenue declines in certain product lines, we foresee solid results. We maintain a positive stance on the stock and suggest that any pullback might present a buying opportunity for those looking to initiate or expand their position. Let’s reflect on our past call before delving into the future.

We first initiated our coverage of Microsoft on November 17, 2022, when the stock was trading at $241.68. Our positive outlook was reiterated in January 2023, with the stock at $248.16. Today, it trades at $367.75, marking approximately a 50% increase since last year. We are especially pleased with Microsoft’s aggressive investments in Artificial Intelligence, particularly in Open AI. Microsoft is redefining what it means to be a software company.

Despite macroeconomic challenges and difficult end-markets, we are optimistic about Microsoft’s future. Over the past year, the company has made significant strides in the AI sector. Microsoft is seamlessly integrating AI into its technology and product stack, enhancing productivity for end-users. Azure AI offers business customers access to top-tier models from Open AI, catering to their cost, latency, and performance needs. Additionally, Microsoft has expanded its cloud services to support Oracle’s database, easing the migration of on-prem databases to its cloud. The recent rollout of Copilot, an intuitive AI framework across applications like Microsoft 365 and GitHub, further cements Microsoft’s dominance in personal and desktop computing. Copilot’s ability to enable businesses to create data-driven websites with minimal input is a game-changer.

The completion of the Activision gaming acquisition is another feather in Microsoft’s cap, significantly boosting its presence in the gaming industry and attracting new talent and brand recognition among younger gamers. The pace of innovation Microsoft is demonstrating is unparalleled, positioning it as the world’s leading company.

Valuations are tricky to forecast, but currently, Microsoft can be characterized as a value stock, a growth stock, and a momentum stock, all rolled into one. Apart from the macroeconomic headwinds, which may subside as interest rates have recently decreased, we see little impeding Microsoft’s path to continued success. 

Update – January 27, 2023 – When we wrote our Microsoft research post on November 17, 2022, it was trading at $241.68 and we were bullish. Microsoft was trading down from its 5-year high, but today the stock is up 2.68% and as we head into February 2023, we are feeling more bullish and think 2023 can be a breakout year. A few days ago, Microsoft reported revenue of about $52.75 billion for its fiscal 2023 second quarter, which met the company’s guidance of $52.85 billion. Although this represents a 2% decline from the previous year, we were pleased to see Microsoft’s cloud computing platform, Azure, showing strong growth with a 31% increase from the previous year or 38% on a constant currency basis. The Intelligent Cloud segment revenue was up 18% overall. Microsoft’s Windows, devices, and gaming businesses saw significant year-over-year declines.

Although market conditions are volatile, we believe it is better to “water the flowers” in your investment portfolio during challenging economic times. As market conditions improve, we believe that momentum players will begin to take positions in technology companies that have sustainable moats. Microsoft is such a company. The company’s focus on helping customers optimize spending on Microsoft services should help retain customer loyalty and reinvigorate spending once macroeconomic pressures abate.

Most importantly, Microsoft also announced a strengthening partnership with OpenAI, making Azure the exclusive cloud provider for OpenAI’s technology and reportedly owning an approximately 49% stake in OpenAI after a $10 billion investment, positioning Microsoft as a leader in AI. This allows Microsoft to gain a leg-up on Google and have an artificial technology that it can embed into its Microsoft 365 Office platforms. Over-time, we believe this will allow Microsoft to increase its pricing to locked-in corporate customers. Microsoft’s technology platform for both individuals and business users is critical and will continue to be needed. Whether it be individuals using Microsoft Word for job resumes or using Excel to calculate monthly budgets, Microsoft’s tools are priceless. Business users have similar needs. Whether employees are at home or in the office, they need Microsoft tools. LinkedIn is emerging and growing player in the social media space.

At today’s price of $248.16, we view the stock as still under pressure due to the pending Activision acquisition, which is being held up by lawsuits and uncertainty in global markets. At the moment though, its competitor Google is also tied up in its own anti-trust lawsuit. We believe that as the U.S. government’s focus turns to Google, the Activision acquisition will eventually close. As the economy starts to stabilize, we believe that Microsoft’s stock will be poised to significantly grow from current levels. 

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