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  • Writer's pictureXinyu (Shawn) He

Why did Microsoft Stock Surge After Earnings?

Updated: Jun 4, 2023

Our founder predicted Microsoft's (NASDAQ: MSFT) growth as early as February 2, 2023 based on their relationship with OpenAI, the stock has since surged 15%+ in 2 months. Microsoft (NASDAQ: MSFT) delivered another stellar earnings report for the fiscal third quarter of 2023, beating analyst estimates and highlighting its strong growth in cloud and artificial intelligence. The stock soared 9% on Wednesday, adding $174 billion to its market value. Why did they surge?


Earnings and Revenue Beat


Microsoft reported earnings of $2.35 per share, up 10% year over year and above the consensus estimate of $2.24 per share. Revenue grew 7% year over year to $52.86 billion, also beating the consensus estimate of $51.02 billion.


The company’s revenue growth was driven by strong performance across all its segments, especially Intelligent Cloud, which grew 17% year over year to $18.4 billion. Within this segment, Azure, Microsoft’s cloud computing platform, grew 50% year over year, accelerating from 46% growth in the previous quarter.

Microsoft also saw robust growth in its Productivity and Business Processes segment, which grew 15% year over year to $15.1 billion. This segment includes Office 365, LinkedIn, Dynamics, and Teams. The company said it has more than 300 million daily active users for Teams, its communication and collaboration platform that competes with Slack (NYSE: WORK).


The company’s More Personal Computing segment, which includes Windows, devices, gaming, and search advertising, grew 2% year over year to $19.4 billion. The segment was impacted by supply chain constraints that affected its device sales and gaming revenue.



Artificial Intelligence Focus


One of the most notable aspects of Microsoft’s earnings call was the frequent mention of artificial intelligence (AI), which reflects the company’s strategic focus on this emerging technology. The company mentioned “artificial intelligence” 50 times on the call, compared to 29 times in the previous quarter.


Microsoft CEO Satya Nadella said that AI is “the defining technology of our time” and that Microsoft is “investing aggressively” in this area. He cited examples of how Microsoft is using AI to enhance its products and services, such as:

  • ChatGPT: Microsoft’s natural language processing model that can generate realistic text and dialogue. The company has a $10 billion stake in OpenAI, the parent company of ChatGPT.

  • Teams: Microsoft’s AI-powered Teams product has thousands of paid customers who are using it to streamline their workflows and improve their productivity.

  • Azure: Microsoft’s cloud platform offers a range of AI services and tools for developers and enterprises, such as Azure Cognitive Services, Azure Machine Learning, and Azure Synapse Analytics.

  • Bing: Microsoft’s search engine uses AI to deliver more relevant and personalized results for users.

Nadella said that AI is “a massive opportunity” for Microsoft and that the company is “well positioned” to capture it.


Outlook and Valuation


Microsoft provided guidance for the fiscal fourth quarter of 2023, which was slightly below analyst expectations. The company expects revenue of $53.6 billion to $54.8 billion, compared to the consensus estimate of $54.9 billion. The company also expects operating income of $18.5 billion to $19.5 billion and earnings per share of $2.22 to $2.32.


Despite the conservative guidance, analysts remain bullish on Microsoft’s long-term prospects and raised their price targets for the stock after the earnings report. Bank of America raised its price target from $320 to $340 and maintained a “buy” rating. Wedbush raised its price target from $315 to $325 and maintained an “outperform” rating. JPMorgan raised its price target from $305 to $315 and maintained an “overweight” rating.


At Wednesday’s closing price of $292.85, Microsoft trades at 32 times its trailing 12-month earnings and 28 times its forward earnings. While this valuation may seem high compared to the S&P 500’s average price-to-earnings ratio of 23, it is justified by Microsoft’s strong growth potential, competitive moat, and diversified revenue streams.


Microsoft is one of the best-performing tech stocks in the market and has rewarded investors with consistent returns over the years. The company has a solid track record of innovation and execution and is well positioned to benefit from the secular trends in cloud computing and artificial intelligence. Investors who are looking for a high-quality tech stock with a stable dividend should consider adding Microsoft to their portfolio.


If Microsoft becomes evaluated as a growth stock, it could have significant growth potential at its current PE ratio.


 

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