***Please note that this does not constitute a stock recommendation for buy or sell. This is purely my own analysis and is to be taken as my own personal opinion and not to be taken as correct. Kindly do your own diligence in purchasing stocks.
With the release of chatGPT by openAI in November 2022, there is a lot of hype surrounding AI and AI related stocks. Microsoft even released a post regarding its partnership with openAI to accelerate breakthroughs in AI. However, Microsoft has also been in the news to join in the rest of the tech companies in layoffs – they have just announced layoffs of 10,000 employees and released its Q2 2023 earnings. Such news aside, as a company stock now, is it worth investing in it with rumours of incoming recession? Let’s take a deeper look at its business.
Anyone who uses a computer or has worked should be no stranger to some of Microsoft products. They have grown a lot since back in the day under Bill Gates, growing from selling licensing softwares to developing its own suite of hardware products, Azure cloud services, LinkedIn and gaming products (Xbox). These are classified into 3 broad categories – Productivity & Business Processes, Intelligent Cloud and More Personal Computing. Honestly speaking, it is somewhat quite diversified for a tech company.
For the last quarter, revenue is up slightly but net income is down. Comparing year on year 2022 against 2021, the earnings doesn’t seem as bad as expected. Yes, there is a slight decrease in net income, but the company is still highly profitable. On the top line, Productivity & Business Processes and Intelligent Cloud have actually increased in revenue and net income, with the main drag coming from More Personal Computing. Microsoft Cloud has a healthy gross margin percentage of 72%. What does More Personal Computing contain? It actually contains several product lines such as Windows OEM, Windows Commercial products and cloud services, Devices, Xbox content and services, and lastly Search and news advertising. The main drag from More Personal Computing is from Windows OEM (the Windows 10 system preinstalled in computers made by original equipment manufacturers.), devices and Xbox. All these which I feel are still fair. The main engine of growth now would probably be from the Microsoft Cloud service.
All things considered, with Microsoft being still a very profitable company and having tailwinds of the AI hype and mania, I would still consider Microsoft a good buy and I have initiated a small position in it. In addition, the Federal Reserve will be taking a breather on the interest rates, and this will cause USD to depreciate and hopefully this will help in its revenue. The thing is that I have not considered an exit point at this point in time and for now, my strategy for US stocks in my portfolio would be industry rotation. Soft tentative target would be to start considering once the share price hits 300 USD a piece. Though its highest so far have gone up to 343 USD approximately. I can only hope that I am able to offload at the correct time, being mindful of potential recession currently in the chatter.
Any thoughts or comments? Let me know what do you think or if I am wrong in any area.
Thotsledger 