Microsoft's Future Bright Despite Weaker Than Expected Q4 Earnings

-Earnings per share came in at 2.23 versus an expectation of $2.29 per share by analysts.

-Operating income came in 8% higher at $20.5 billion, and net income was up 2% at $16.7 billion.

-Revenue was up 12%, coming in at $51.8 billion, but slowing to multi-year lows.

“In a dynamic environment, we saw strong demand, took share, and increased customer commitment to our cloud platform. Commercial bookings grew 25% and Microsoft Cloud revenue was $25 billion, up 28% year over year,” said Amy Hood, executive vice president, and chief financial officer of Microsoft. “As we begin a new fiscal year, we remain committed to balancing operational discipline with continued investments in key strategic areas to drive future growth.”

Key Impact During the Quarter

-Microsoft took a $595 million hit on currency losses, mainly due to Ukraine.

-Production shutdowns in China continued to weigh on results through May, and weakness in the PC market also contributed to weaker earnings.

Microsoft NASDAQ: MSFT is a technology and software company based out of Redmond, Washington. It provides a range of hardware and software solutions including personal computers, operating systems, and cloud services. The stock was up 4% after hours on Tuesday despite a slowdown in revenue.  Overall, analysts were happy with the results despite the slowdown, which is being seen as a temporary blip, and the future is expected to remain bright.

Microsoft Business Forecast

Microsoft continued to witness strong growth across key business divisions during the quarter. Office and cloud service products were up 9% and up 13% on a constant currency basis and Office remains central to Microsoft’s strategy to drive revenue for the next few years. Market penetration remains relatively low for the service and Microsoft is hoping that it can execute its strategy to increase market penetration.

LinkedIn revenue grew at 26% or 29% at a constant currency basis. Revenue remains strong despite talks of Microsoft’s poor strategy with LinkedIn i.e. making it into more of a social media site rather than a professional network, which has led many users to reduce their interaction with the site.

Microsoft Cloud also remains key to the company’s strategy and the company continues to focus on the area as it looks to compete with the likes of Amazon for market share. Microsoft’s strategy has been more product focused when it comes to its cloud, and it has chosen to offer services that are intrinsic to its customers as it looks to outcompete Amazon. Cloud services were up 22% during the quarter, while other cloud services were up  40% during the quarter.

Personal computing grew only 2% as the global slowdown, geopolitical events in Russia and Ukraine, and China’s lockdown all weighed on demand.

Microsoft Outlook

Microsoft’s future continues to look bright, but management has become increasingly dependent on the cloud to drive earnings. Given the global slowdown, PC sales remain a worry for the year, and Microsoft Windows is slowly but surely losing market share in the operating system market. Microsoft has lost over 17% of its market share in the last decade, as alternatives such as Linux continue to gain market share. The biggest issue facing Microsoft is that the system continues to become increasingly bloated, which is turning off many users.

Microsoft’s biggest driver of earnings, for the time being, is its cloud system. Management may have become overly focused on the business segment, even at the expense of other segments.  Microsoft has increasingly looked to make the system open source as a strategy to gain market share and is increasingly offering licensing and hybrid cloud products to maximize revenue. The general consensus is that Azure will continue to be a strong contender for the foreseeable future, and therefore, Microsoft's revenue will remain in the high double digits for a few years, despite a slowdown elsewhere.

In general competitors such as Apple NASDAQ: AAPL has also faced headwinds as hardware sales slowed down in the recent past.

Valuation

Microsoft’s valuation remains slightly elevated at 26x P/E, and the higher valuation is a result of the market expecting the cloud to continue to grow quickly until 2030. The stock is down 12% from its 52-week high and its 5-year PEG remains at around 1.7. Profit margins came in at 37%, and with cloud becoming an increasingly larger part of the bottom line, Microsoft’s margins may go higher towards 40%. Microsoft and Amazon NASDAQ: AMZN, continue to be the two biggest competitors