Microsoft (MSFT) Breaks Out After a Strong Quarter with a Focus on AI

Stock (Symbol)

Microsoft (MSFT)

Stock Price


Data is as of
April 26, 2023
Expected to Report
July 31
Company Description
Microsoft Corporation develops and supports software, services, devices, and solutions. Its segments include Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.

The Productivity and Business Processes segment consists of products and services in its portfolio of productivity, communication, and information services, spanning a variety of devices and platforms. This segment includes Office Consumer, LinkedIn, dynamics business solutions, and Office Commercial.

The Intelligent Cloud segment consists of public, private, and hybrid server products and cloud services that can power modern businesses and developers. This segment includes server products and cloud services, and enterprise services.

The More Personal Computing segment consists of products and services that put customers at the center of the experience with its technology. This segment includes Windows, devices, gaming, and search and news advertising.. Source: Refinitiv

Sharek’s Take
David SharekMicrosoft (MSFT) stock jumped to a 52-week high after the company reports earnings that beat analyst estimates. The strongest operating segment for the company was its Intelligent Cloud business, which had revenue growth of 16%. Azure is part of this segment, and is benefiting from higher use of Artificial Intelligence. In January, MSFT announced a $10 billion investment in ChatGPT maker OpenAI. ChatGPT is a chatbot that uses vast amounts of data to answer complex questions. Microsoft’s Azure is MSFT’s public cloud platform that lets users manage cloud services such as storing data and transforming it. Azure OpenAI combines ChatGPT with Azure, offering AI writing assistance and code generation for large enterprises. MSFT now has 2500 Azure OpenAI service customers, 10x what it had just three months ago.

Founded in 1975, Microsoft develops and supports software, services, devices and solutions that help people in business. Products include computer operating systems such as Windows, productivity applications including Excel and Word, software development tools including Azure, computing devices with its Surface tablets, and video games with its Xbox devices. The company also owns the top social media site for business relationships in LinkedIn. Microsoft has three main divisions, which are listed below, with each bringing in around 1/3rd of revenue. Here’s the breakdown of last qtr’s sales growth by division (note commercial cloud isn’t listed):

  • Productivity & Business Processes — sales +11% and accounted for 33% of total revenue. This division includes:
    • Office Commercial products and cloud services grew 13% driven by Office 365 Commercial growth of 14%.
    • Office Consumer products and cloud services sales grew 1% and Microsoft 365 consumer grew to 65.4 million subscribers.
    • LinkedIn sales increased 8% and saw record engagement last quarter.
    • Dynamics products and cloud services sales up 17% driven by Dynamics 365 sales growth of 25%.
  • Intelligent Cloud — sales +16% and represented 42% of company revenue. This division includes:
    • Server products and cloud services sales up 17% driven by strong Azure performance and other cloud services, up 27%.
  • More Personal Computing — sales -9% and accounted for 25% of total revenue. This division includes:
    • Windows OEM sales declined 28%.
    • Windows Commercial and cloud services sales grew 14%.
    • Xbox content and services sales grew 3%.Xbox has been the market leader in North America in consoles the past few qtrs among next-gen consoles. 
    • Search and news advertising sales increased 10%.
    • Devices revenue decreased 30%.

Microsift is one of only two companies to hold a AAA credit rating. The other being Johnson & Johnson. MSFT stock has good momentum with AI, but this company isn’t a rapid grower like it used to be. Its a conservative stock with an Estimated Long-Term Growth Rate of just 12% a year, a dividend yield of 1%, and a stock buyback program. The dividend has been increasing every year since 2006. MSFT is part of the Conservative Growth Portfolio. Profit growth is accelerating, thus I feel the stock goes higher from here.

One Year Chart
Last quarter in this spot I stated the stock had been going lower, and that’s because profit growth has slowed and the stock market has been unforgiving. Now, profit growth has accelerated and the stock has been making new highs.

Notice quarterly profit growth just went from -6% to +10%, with +15% on deck for next quarter.

Six qtrs ago, MSFT had a P/E of 36. Now, with a P/E of 27, this stock is a lot less expensive than it used to be. note, MSFT has a fiscal year end of June 30. Since we are already in May, I calculated te P/E based on next year’s estimates.

The Est. LTG is 12%, unchanged since last qtr.

Earnings Table
Last qtr, Microsoft delivered 10% profit growth and beat estimates of 0% growth. Revenue increased 7%, year-on-year, and whipped estimates of 3%. Excluding unfavorable FX impact, revenue grew 10%. Commercial bookings grew 11%. Microsoft Cloud sales increased 22% and represented 54% of company sales.

Revenue growth was driven by strong product renewals and installed base expansion across all workloads and customers in Office 365 Commercial, which was led by small and medium businesses, as well as share gains in Azure and server services. These growth trends were partially offset by softer PC demand as elevated inventory levels adversely affected the business.

Annual Profit Estimates increased across the board this qtr.

Qtrly Profit Estimates are for 15%, 11%, 16%, and 12% profit growth the next 4 qtrs. These estimates increased too. For next qtr, management expects commercial bookings growth to be flat as they lap a very strong bookings growth last year. For Productivity and Business Processes, management expects revenue to grow 10% to 12% in constant currency, led by Office 365. For Intelligent Cloud, they expect revenue to grow 15% to 16%, driven by Azure. For More Personal Computing, due to weak PC demand, they expect revenue to lag overall market growth. Analysts believe Microsoft’s revenue will grow 7% next quarter.

Fair Value
My Fair Value on MSFT is a P/E of 30, up from 27 last qtr.

Note in this table I’m looking ahead to next year when looking at a Fair Value. There’s 11% upside for 2024, which is a decent figure. And with the company upping annual estimates, this profit estimate could continue to rise.

Microsoft has a Fiscal Year End on June 30th.

Bottom Line
Microsoft (MSFT) was a stellar stock for much of the last decade, but has been weak recently. I expect the stock growth will closely resemble annual profit growth in the future.

Microsoft’s parternship with OpenAI is combining Azure, Bing, and Office with with ChatGPT. This company has a lot of growth opporunity ahead.

MSFT jumps from 20th to 11th in the Conservative Stock Portfolio Power Rankings.

Power Rankings
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