Star company earnings season Raiders
【2024.10】How do you view Microsoft's performance? This business will be the biggest highlight!
Since entering 2024, microsoft has continued its upward trend from 2023, becoming the second company after apple to surpass a market cap of $3 trillion. After the post-market trading on October 30th, $Microsoft (MSFT.US)$ the latest earnings will be released, and its stock price will also be tested by the market upon the arrival of the earnings.
Every time a company releases its earnings, it may also imply a good trading or investment opportunity. Before that, investors need to understand how to interpret its earnings. So, how should we analyze microsoft's performance? What indicators might have a significant impact on its stock price? In fact, the answers lie in microsoft's development path over the past few years.
We know that for a company to grow and earn more money, there are two main paths: either increase revenue or improve operating margin. As the saying goes, having one talented individual is enough to ensure success – but what if both are achieved?
microsoft, as a representative, has successfully transformed from being dominated by personal computer systems business to being dominated by cloud computing business from the fiscal year 2018 to fiscal year 2024; at the same time, commercial businesses including Office 365 office system have shifted from one-time sales to a subscription-based SaaS model.
Against the backdrop of a successful transformation, microsoft's revenue nearly doubled and its operating margin more than doubled from fiscal year 2018 to fiscal year 2022. With both factors combined, microsoft's net profit has increased by more than 3 times, far exceeding the revenue growth rate. Microsoft's stock price has also surged by nearly 5 times since the end of the fiscal year 2018.
Since microsoft's success over the past five years has stemmed from steady revenue growth and continuous improvement in operating margin, the focus on microsoft's performance still needs to start from these two indicators.
microsoft's current revenue is mainly divided into the following three categories:
The first segment is the personal business, which can be said to be Microsoft's traditional business. Although it can provide a stable cash flow, the growth continues to slow down, and even negative growth appeared in the previous 3 quarters.
Since the PC era has become a thing of the past, the market's expectations for this segment were not high to begin with. However, in the Q1 of the 2024 fiscal year, this business segment grew by 2.5% year-on-year, showing stable rebound. From Q2 to Q4 of the 2024 fiscal year, the year-on-year growth rate exceeded 10%, indicating a certain level of recovery demand in the PC market. In the upcoming new performance reports, we can continue to observe whether the revenue of the personal business can continue the rebound trend.
The second segment is the azure business under microsoft's asia vets umbrella, currently the world's second-largest cloud computing service provider, second only to Amazon's AWS, and also a major source of revenue for microsoft. From fiscal year 2019 to fiscal year 2022, microsoft's intelligent cloud business maintained a growth rate of over 20%, with the growth rate continuously increasing. However, by the fiscal year 2023, the revenue growth rate of the intelligent cloud business began to decline quarterly, decreasing to 15% year-on-year. The good news is that microsoft's breakthroughs in the AI field also help upgrade the cloud business.
In the Q1 financial report of 2024, benefiting from the boost of AI, microsoft's intelligent cloud business revenue growth rate began to rebound, with a year-on-year increase of about 19%. By the Q4 of the 2024 fiscal year, intelligent cloud business revenue reached 28.5 billion US dollars, with a year-on-year growth of about 18.8%, a slight decrease in growth rate compared to the previous quarter, but still maintained around 19%. In the future quarters, we can continue to focus on whether microsoft's intelligent cloud business can maintain a high growth rate.
The third segment of the business is productivity and business process business, primarily for commercial use, which we refer to as commercial business. Among them, the subscription revenue of office 365 accounts for the majority. Microsoft's office software service, about 10 years ago, transitioned from one-time sales of perpetual licenses to a subscription model, which can be said to be a very successful transformation of business model.
The growth in software subscription revenue is driven by both an increase in customer numbers and price increases. In the past, microsoft rarely raised prices, and revenue growth was mainly driven by customer growth. Due to the monopolistic nature of microsoft's office system and its high stickiness, existing customers hardly ever leave, and almost every new customer can drive growth. Therefore, the growth of microsoft's commercial business has been very stable, with growth rates fluctuating around 15% in the past few fiscal years.
However, in the first two quarters of the fiscal year 2023, as enterprises cut costs and increase efficiency, compressing IT spending, microsoft's commercial business revenue also fell to a level of 7%. Fortunately, the Copilot subscription product with AI support launched by microsoft later on, integrated into the office, increased the user unit price and also drove the growth of commercial user revenue. Microsoft's commercial business revenue growth rate began to rise again in the Q3 of the 23 fiscal year, with year-on-year growth rates exceeding 10% in each subsequent quarter.
In the upcoming new performance reports, microsoft's commercial business part of Copilot subscription status, and the potential accelerated growth of commercial business brought about by this, may still be the most noteworthy points. Microsoft's commercial business, and may even replace the intelligent cloud business, become the biggest highlight among microsoft's various businesses, and may also become the deciding factor affecting stock prices.
Moving on to the second focus point for Microsoft, the profit margin. Generally speaking, the final profit margin of a company is primarily based on the net profit margin. However, in each performance report, Microsoft only discloses the operating margin for the three business modules separately. The operating margin deducts some non-core related income and taxes to arrive at the net profit margin. Looking at the data from the fiscal years 2018-2022, we can see that Microsoft's operating margin improvement is comprehensive.
Among them, the profit margin of the commercial business is the highest, and the improvement situation is also very stable. The personal business began to experience a certain degree of decline in the 2022 fiscal year, which is influenced by the industry cycle, and the market may not have had high expectations originally. However, in the 4 fiscal quarters of the 2024 fiscal year, three quarters had a profit margin of over 30%, to some extent demonstrating the recovery of the industry cycle.
It is worth noting that the profit margin of the intelligent cloud showed a slight decline in the 2022 fiscal year, and maintained a downward trend in the first three quarters of the 2023 fiscal year. However, in the Q4 fiscal quarter of the 2023 fiscal year, the profit margin of the intelligent cloud business began to rebound, and in the first four quarters of the 2024 fiscal year, it exceeded 45% each time, reaching a historical high at one point.
The reason for the previous decline in the profit margin of Microsoft's intelligent cloud business may be due to the penetration rate of the cloud computing industry reaching a certain stage, intensifying competition between companies, which may have led to a decline in Microsoft's pricing power. As a result, they may have had to lower prices or increase sales promotions to acquire customers.
Now, Microsoft's intelligent cloud business profit margin has rebounded significantly, perhaps due to the boost from AI bringing product competitiveness and bargaining power, thus bringing about positive changes in profit margins. In the future, we need to continue monitoring whether Microsoft's intelligent cloud business can maintain a high level of profit margin.
Of course, the most anticipated aspect is the potential for a significant increase in the average product price in the Office business due to the incorporation of the Copilot product. With the increasing penetration rate of the Copilot product, Microsoft's commercial business led by Office 365 has taken another step up in profit margin in the first four quarters of the 2024 fiscal year, reaching a historical high of over 53%. In the upcoming new performance reports, we also need to pay attention to whether Microsoft's commercial business can continue to maintain a high level of competitiveness and profit margin.
Seeing this, you may have some new insights on how to interpret Microsoft's performance. It is worth mentioning that for many star companies, every performance release may represent a rare trading opportunity for different types of investors.
For example, if investors interpret the past performance and combine it with the latest developments and feel that a company's latest performance will release some positive signals and be bullish about the short-term stock price, they may consider going long. The way to go long could be considering buying common stock or consider buying call options, etc.
On the contrary, if investors think that a company's latest performance will not be optimistic and will put pressure on the short-term stock price, investors may consider going short. The way to go short could be considering selling short through margin trading or consider buying put options, etc.
Of course, if investors think that the long and short direction of a company's performance is not clear, but the stock price may fluctuate significantly after the performance is released, investors may consider making the volatility of the stock price long and buying both call and put options through the strategy of straddle to seize potential opportunities.
To summarize,
based on Microsoft's successful transformation experience in recent years, we need to focus on the changes in revenue and profit margin of its three business segments.
Among them, the consumer business is a cash cow, but not highly regarded by the market. Asia vets cloud computing service business was the growth engine in the past, and now with stable revenue growth and rebounding, the operating profit margin has reached a new high. We need to observe in the upcoming new earnings whether microsoft can maintain the rebound in growth and the current profit margin level. With the boost from the Copilot product, Microsoft's commercial business has undergone significant changes in revenue growth and operating profit margin, which may also have a major impact on the stock price.
Each time the company announces its performance, it may bring potential trading opportunities. Investors can consider suitable trading varieties according to their personal risk tolerance.