Microsoft msft On April 30th, we released our third quarter revenue report. There is Morningstar’s view on Microsoft’s revenue and stocks.
What I think about Microsoft’s revenue
Microsoft’s third quarter results have broken through the high end of company guidance. Revenues rose 13% year-on-year to $700.1 billion, compared to the high-end guidance of $68.7 billion, operating profit margin was 45.7% compared to the high-end guidance of 44.6%.
Why is it important: The results are overall good, defiing top and bottom estimates. All segments revenues exceeded the high end of guidance. Importantly, traditional artificial intelligence workloads show very impressive performance within Azure.
•In our view, short-term demand indicators are robust. Commercial bookings grew 17% year-on-year in certain currencies, based on a surge in Navyure’s commitment from Openai and other large transactions. The remaining performance obligations rose 34% year-on-year to $315 billion.
•Demand for Azure AI services is surged, but this is a long-term positive. Azure remains capacity constrained, but AI performed better than internal expectations, but traditional workloads have recovered. Azure’s growth rate exceeded guidance, at 35% in a quarterly constant currency.
Conclusion: We have increased our broad mote Microsoft fair value estimate from $490 to $505, based on good results and guidance, but the long-term estimate remains unchanged. We consider stocks to be attractive, and stocks remain one of the top picks.
Appearance: The overall guidance is impressive in this environment. Microsoft provided more than expected top-line and bottom-line guidance, including revenues of $73.7 billion, operating margin of 43.4% and earnings per share at the midpoint of $3.34.0%.
•The company points out that there is no change in customer behavior based on tariffs and Doge.
Big picture: We see the expansion of hybrid cloud environments, the surge in artificial intelligence, and the results that bolster the long-term papers of Navyure. It focuses on growth estimation, focusing on Azure, Microsoft 365 E5 migration, and traction with the power platform.
Microsoft stock price
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Microsoft’s Fair Value Estimates
The four-star rating believes Microsoft’s stock is undervalued compared to its long-term fair value estimate of $505 per share. This means that enterprise value/revenue for 2025 will be 13 times higher and 38 adjusted prices/revenues.
Models the combined annual growth rate over five years against approximately 13% revenues, including Activision acquisition. We envision stronger revenue growth with the recession over the past decade of Microsoft in 2008, complete evaporation of mobile handset revenues due to the disposal of the Nokia Handset business, and the full evaporation of the onset of the model transition to subscriptions (initially slowing revenue growth). However, we believe that macro and currency factors will put pressure on revenues in the short term. We believe revenue growth will be driven by Azure, Office 365, Dynamics 365, LinkedIn and new AI adoption.
Learn more about Microsoft’s fair value estimates.
Economy Moat Rating
Microsoft as a whole allocates a wide range of economic moats, primarily resulting from switching costs, and assigns network effects and cost benefits as secondary moat sources. Based on the company’s segment, we believe productivity and business processes, PBP, and intelligent cloud, or ICs are gaining wider moats, with more personal computing units guaranteeing narrow moats. Microsoft’s Hori believes that it could potentially be able to earn returns above the cost of capital over the next 20 years.
Customers are evaluating Microsoft’s products as a standalone solution and for the company’s huge product breathing, and believe that these applications are vigorously integrated with one another. In our opinion, the strength of these products is very important, but Microsoft should not overturn the importance of all the solutions offered under one umbrella, as customers are usually trying to integrate vendors. These factors combine to strengthen our wide moat. Microsoft offers a wider set of relevant and attractive solutions, and we believe that as multiple products are adopted, customers will become more deeply entrenched.
Learn more about Microsoft’s Economic Moat.
Financial strength
Microsoft believes it enjoys a strong balance sheet, increased revenue and excellent financial strength position resulting from its expanded margins. As of June 2024, Microsoft had $76 billion in cash equivalents, offset by $52 billion in debt and had a net cash position of $24 billion. The total leverage is 0.5 times the 2024 EBITDA. Our basic case assumes that revenues will increase at a healthy pace through adoption of Azure Public Cloud, Office 365 upselling efforts, AI adoption, and a wider digital transformation initiative.
Learn more about Microsoft’s financial strength.
Risk and uncertainty
Microsoft assigns MidningStar ratings to media ratings. Microsoft faces different risks depending on the product and segment. High market share for client-server architectures over the past 30 years means that significant margin revenues are at risk, especially in OS, offices and servers. So far, Microsoft has managed to increase revenue in a ever-evolving technology landscape, enjoying success both by moving existing workloads to the cloud for current customers and attracting new clients directly to Azure. However, we need to continue to drive revenue growth for cloud-based products faster than on-premises products declines.
Learn more about Microsoft’s risks and uncertainties.
Msft Bulls says
•Public cloud is widely considered the future of enterprise computing, and Azure is the key service that will help evolve first into a hybrid environment and ultimately towards a public cloud environment.
•Microsoft 365 continues to benefit from upselling to high-priced stockholding units as customers are willing to pay for better security and team calls.
• Microsoft has a monopoly position in various regions (OS, Office) that act as cash cows to promote Azure growth.
Msft Bears says
•Momentum is slowing down, especially with a shift to ongoing subscriptions in the office. This is generally considered a mature product.
•Microsoft does not have a meaningful mobile presence.
•Microsoft is not the leading source of growth, especially Azure and Dynamics.
This article was edited by Gautami Thombare.
