Analyzing Microsoft’s (MSFT) Soaring Success – What’s Next?

Shares of Microsoft Corporation (MSFT) have been performing exceptionally well lately, with the stock surging more than 12% over the past month. Moreover, it hit a new 52-week high of $376.35 in the previous session. The stock has gained more than 20% over the past six months and nearly 55% over the past year.

The rally in the stock kicked off a couple of days after Microsoft reported upbeat fiscal 2024 first-quarter results. Since then, the stock has added more than $350 billion to its market capitalization. MSFT is the second-largest component in the S&P 500 with a market cap of $2.796 trillion, behind only Apple Inc. (AAPL) at $2.951 trillion.

Market research firm Bespoke Investment said that MSFT has joined AAPL as the second individual company with a larger market cap than the companies that comprise the Russel 2000 index.

Now, let’s discuss the factors that could impact MSFT’s performance in the upcoming months:

Solid Financial Performance in the Last Reported Quarter

For the fiscal 2024 first quarter that ended September 30, 2023, MSFT reported revenue of $56.52 billion, beating analysts’ estimate of $54.55 billion. This compared to the revenue of $50.12 billion in the same quarter of 2022.

Microsoft’s Intelligent Cloud segment, which comprises Azure, public cloud, SQL Server, Visual Studio, Nuance, Windows Server, GitHub, and enterprise services, was up 19.4% year-over-year.

MSFT’s Productivity and Business Processes segment posted $18.59 billion, up 13% from the previous year’s period. This business unit comprises Microsoft 365 productivity app subscriptions, LinkedIn, and Dynamics enterprise software. The software company’s gross margin grew 16% year-over-year to $40.22 billion.

In addition, the software maker’s operating income came in at $26.90 billion, an increase of 25% year-over-year. Its net income rose 27% year-over-year to $22.29 billion. MSFT posted an EPS of $2.99 versus the consensus estimate of $2.65. This was up 27.2% from the same period last year.

As of September 30, 2023, the company’s cash and cash equivalents stood at $80.45 billion, compared to $34.70 billion as of June 30, 2023. Its total current assets totaled $207.59 billion, compared to $184.26 billion as of June 30, 2023.

For the fiscal 2024 second quarter, Amy Hood, MSFT’s finance chief, expects the company’s revenue to come in the range of $60.40 billion to $61.40 billion, which implies approximately 15% year-over-year growth.

Robust Historical Growth

Over the past three years, MSFT’s revenue grew at a CAGR of 14.1%. Its EBITDA and net income improved at CAGRs of 16.7% and 17.5%, respectively, over the past three years. Also, the company’s EPS increased at a CAGR of 18.5%. Its levered free cash flow improved at 15.9% CAGR over the same timeframe.

Further, the company’s tangible book value and total assets increased at CAGRs of 25.7% and 14% over the same period, respectively.

Rebound In Cloud Spending

Revenue from Microsoft’s Azure cloud business surged 29% year-over-year during the September quarter, compared with 26% growth in the fourth quarter. Moreover, Microsoft is pulling ahead of its major competitors,, Inc. (AMZN) and Google parent Alphabet Inc. (GOOGL), in the race to recover from a two-year slowdown in cloud spending.

When multi-decade inflation hit last year, the Fed hiked interest rates, and companies responded by lowering their tech spending as a part of their cost-reduction measures. The inflation has fallen sharply from its peak of 9.1% hit in June last year. The Consumer Price Index (CPI), the most widely used measure of inflation, further showed signs of easing in October.

The core CPI, excluding volatile food and energy prices, increased 0.2% for the month and 4% year-over-year, lower than the estimates of 0.3% and 4.1%, respectively. Also, the annual level was the lowest in nearly two years and down from 4.1% in September. With declining inflationary pressures, organizations’ cost-cutting efforts have begun to wane, which should bode well for MSFT.

According to the latest forecast from Gartner, worldwide end-user spending on public cloud is projected to grow by 20.4% to a total of $678.80 billion in 2024, up from $563.60 billion in 2023. Growing business needs and emerging technologies like GenAI drive cloud model innovation.

MSFT is “still helping customers use the Microsoft Cloud to get the most value out of their digital spend, and driving operating leverage,” CEO Satya Nadella said in the latest earnings release.

Significant Advancements in AI

MSFT has been making several initiatives to infuse generative AI into its software and services.

In January this year, Microsoft announced a multiyear, multibillion-dollar investment in ChatGPT-maker OpenAI. The agreement marked the third phase of the partnership between the two companies after MSFT’s prior investments in 2019 and 2021. The company is providing its Azure cloud computing infrastructure for OpenAI.

Also, Microsoft is adding OpenAI models to its consumer and enterprise software products.

In February, the company launched a new, AI-powered Bing search engine and Edge browser with built-in support for OpenAI’s ChatGPT. The new Bing search version could deliver better search, more accurate answers, a new chat experience, and the ability to generate content.

Further, on March 16, the software maker announced the addition of AI tools to its Office productivity applications and introduced a feature called Microsoft 365 Copilot. The Copilot feature uses next-gen AI to automate and simplify tasks and offer suggestions. MSFT announced that Microsoft 365 Copilot in Windows will be available on September 26.

Starting November 1, Microsoft 365 Copilot will be generally available for enterprise customers. In addition, this AI-powered Copilot is added to the company’s cybersecurity offerings and GitHub service for software developers.

On November 8, MSFT-owned GitHub introduced a Copilot assistant that can assist developers in working with their employers’ internal code, priced at $39 per person a month. The new launch might help the company boost revenue in its cloud business unit by taking enhanced advantage of partner OpenAI’s technology.

Recovery in the PC Market

MSFT reported a 4% growth in sales of Windows operating system licenses to device makers in the last reported quarter, putting an end to a streak of five quarters of year-over-year declines. Amy Hood stated that the PC market has started to stabilize.

As per the estimates from Gartner, worldwide PC shipments totaled 64.3 million units during the third quarter of 2023, a decline of 9% from the third quarter of 2022. A 9% decrease in the third quarter compared to a 30% decline in the first quarter.

After eight straight quarters of decline, the PC market is expected to begin recovery in the fourth quarter of this year. For 2024, Gartner projects the global PC market to witness 4.9% growth, driven by both the business and consumer segments.

“The good news for PC vendors is that the worst could be over by the end of 2023,” said Mikako Kitagawa, Director Analyst at Gartner. “The business PC market is ready for the next replacement cycle, driven by the Windows 11 upgrades. Consumer PC demand should also begin to recover as PCs purchased during the pandemic are entering the early stages of a refresh cycle.”

In September, MSFT introduced new Surface computers and revealed details about the release of this year’s version of Windows 11. The company unveiled the Surface Laptop Studio 2 and the Surface Laptop Go 3; both computers will have Microsoft’s revamped Windows 11 OS, which includes its Copilot software. The company could capitalize on the PC market’s expected recovery with these new launches.

Favorable Analyst Estimates

Analysts expect MSFT’s revenue for the second quarter (ending December 2023) to grow 15.6% year-over-year to $60.96 billion. The consensus EPS estimate of $2.75 for the ongoing quarter indicates an 18.7% year-over-year rise. Moreover, the company has topped the consensus revenue in three of the trailing four quarters and EPS estimates in all the trailing four quarters.

Additionally, for the fiscal year (ending June 2024), Street expects MSFT’s revenue and EPS to increase 14.5% and 14.1% year-over-year to $242.69 billion and $11.19, respectively. Also, the software company’s revenue and EPS for the fiscal year 2025 are expected to increase 13.8% and 15.1% from the previous year to $276.22 billion and $12.88, respectively.

Bottom Line

Microsoft’s revenue and earnings beat analysts’ expectations in the last reported quarter, fueled by its cloud business strength, with Microsoft Cloud revenue up a staggering 24% year-over-year. Further, the software giant continues to make numerous advancements in AI, helping it regain tech leadership.

"With copilots, we are making the age of AI real for people and businesses everywhere," said Satya Nadella. “We are rapidly infusing AI across every layer of the tech stack and for every role and business process to drive productivity gains for our customers,” he added.

According to Brent Thill, Jefferies analyst, the tailwinds of AI have begun to kick in for MSFT.

MSFT’s stock notched a new 52-week high in the previous trading session. The software maker’s early dominance in the realm of AI has been the primary driver of the stock’s impressive gains so far this year, and the stock is expected to surge higher in the upcoming months.

According to Bloomberg Intelligence (BI) research, the generative AI market could grow at a CAGR of 42% to reach $1.3 trillion by 2032.

Given MSFT’s solid financials, high profitability, and optimistic growth outlook, it could be wise to invest in this software stock now.

Microsoft (MSFT) Takes Over Activision Blizzard: What's Next for the Tech Stock?

Global technology powerhouse Microsoft Corporation (MSFT), worth nearly $2.47 trillion, concluded its $69 billion acquisition of renowned game developer Activision Blizzard, Inc. last week, pulling off history’s most prominent tech deal after two years of regulatory scrutiny and significant resistance from multiple stakeholders in the gaming industry.

The conclusion of this prolonged deal dispels the lingering uncertainty concerning the Microsoft-Activision partnership. However, the key question on everyone's mind is: What follows this grand acquisition?

The Acquisition and Its Potential Impact

MSFT CEO Satya Nadella, who took the helm in 2014, aims to broaden the company’s business beyond its core operating systems and productivity software domains. ATVI, a partner and competitor to MSFT, stands out among large companies for releasing top-rated games with production values reaching the hundreds of millions.

At the peak of the metaverse trend, the announcement of MSFT's acquisition of ATVI in January 2022 signaled the grandest deal in historical records. The strategy behind the acquisition was to bolster MSFT’s presence in gaming and the metaverse and establish itself as the unrivaled leader in cloud gaming.

Yet, its fruition faced hurdles due to antitrust concerns. Regulators globally analyzed whether the acquisition might result in excessive market control for MSFT. Eventually, the deal received official clearance last week following approval from the U.K. regulators, marking it the largest deal in MSFT's 48-year history.

But there is a significant condition accompanying this clearance. For the next 15 years, MSFT has agreed to surrender cloud-streaming rights for all ATVI games outside the European Economic Area (EEA), including 27 European Union member states along with Iceland, Liechtenstein, and Norway.

Ubisoft, a French game publisher, secured exclusive global streaming rights outside the EEA, while within the EEA, it will share these rights with other competitors, including MSFT/ATVI. This marked a pivotal concession from MSFT, which contributed to aligning with UK regulatory standards.

ATVI enjoyed the title of the largest game publisher in North America, hosting various popular games under its belt, ranging from "Call of Duty" to "Diablo" and "World of Warcraft," amongst others.

MSFT’s acquisition will expand the tech giant's ownership to include all developers under the acquired banner, ranging from Activision Publishing to King, the creator of "Candy Crush."  This strategic addition is expected to enhance MSFT's foothold in the booming mobile gaming industry through synergies with its franchises, such as "Halo" and "Forza," which could generate significant revenue in the coming years.

With a vast list of ATVI's titles under MSFT's umbrella and its robust platforms like Xbox, Game Pass, and Xbox Live, the company is poised to become an even greater force in the gaming sphere. With this, few competitors could rival MSFT's arsenal, enriched further by access to ATVI’s renowned studios, including Treyarch and Infinity Ward.

Xbox head Phil Spencer has consistently championed a transformation of Xbox from a console-centric brand to a content-first platform, focusing on player engagement rather than console sales. The self-disruption philosophy is expected to be further cemented post-acquisition, fortifying the strategy to build a prolific portfolio of games and IPs.

This monumental acquisition could propel MSFT to become the third biggest gaming giant globally in revenue, trailing behind Tencent and Sony.

MSFT's leap into the mobile gaming industry could experience a considerable boost from this deal. As of June 30, 2023, ATVI reported a monthly active user base of 356 million. In the second quarter of 2023, the company posted consolidated revenue of $2.21 billion, with an impressive $943 million derived from the mobile gaming segment. ATVI's prominence in mobile gaming will inevitably contribute to MSFT's anticipated growth in this segment.

Projecting ahead, estimated future cash flows pertaining to this deal, when adjusted to their present value, may surpass the acquisition cost of $69 billion, thereby positioning this alliance as an advantageous venture for MSFT.

Moreover, MSFT can potentially accelerate the growth of the acquired assets using its large-scale resources, including AI-driven initiatives – an added advantage. The acquisition is also fiscally beneficial for MSFT, which secured a high-margin business of Activision at 23.55x forward P/E compared to its 30.15x forward P/E.

Moreover, tech behemoth MSFT is on a promising growth trajectory as it branches out across several tech sectors and could present significant potential to investors over the long term.

Institutional investors have recently made changes to their MSFT stock holdings. Institutions hold roughly 70.6% of MSFT shares. Of the 4,862 institutional holders, 2,038 have increased their positions in the stock. Moreover, 197 institutions have taken new positions in the stock with 19,638,556 shares, reflecting signs of bullishness.

MSFT's workspace communication tool, Teams, has seen substantial growth and is expected to contribute significantly on the backs of expanding customer base and features. This has benefited MSFT in winning shares in the enterprise communication industry. Teams' user growth is attributable to the increasing shift towards hybrid and flexible working models. This trend could boost the fiscal first-quarter financial report to be released on October 24.

Furthermore, MSFT broadened the availability of its Microsoft 365 Copilot feature to a larger customer base during this quarter – which is also anticipated to boost revenue growth. The high adoption rates for Dynamics 365 software are additional factors projected to spur top-line growth in the to-be-reported quarter.

For the fiscal first quarter ending September 2023, MSFT’s revenue and EPS are expected to increase 8.8% and 12.7% year-over-year to $54.53 billion and $2.65, respectively.

Moreover, Wall Street analysts expect the stock to reach $398.24 in the next 12 months, indicating a potential upside of 19.9%. The price targets range from a low of $298.10 to a high of $440.

Bottom Line

The global video game market continues to be dynamic and transformative and is expected to reach $583.69 billion, growing at a CAGR of 13.4% by 2030. With the full integration of the two companies, a significant change in the video game industry could be witnessed. The deal will boost MSFT's gaming revenues and offer benefits to consumers.

Prudent investment decisions necessitate strong consideration of a stock's valuation. MSFT’s forward non-GAAP P/E of 30.15x is 36.4% higher than the industry average of 22.10x, while its forward Price/Sales multiple of 10.46 is 310.1% higher than the industry average of 2.55.

Despite trading at a premium over its industry peers, MSFT's robust financial standing, well-strategized acquisitions, compelling growth trajectory, and optimistic analyst projections position it as an attractive investment opportunity. The stock’s upside potential justifies the premium it demands.

Further bolstering this standpoint is MSFT’s impressive history of shareholder returns. In the fourth quarter of fiscal 2023, it paid dividends and repurchased shares worth $9.7 billion. The company has maintained a steady dividend payment trend for 18 years.

Furthermore, the successful execution of a $60 billion share buyback initiated in 2022, typically renewed by MSFT every few years, is projected to extend through 2025. This highlights MSFT’s another pivotal step in continuing to augment shareholder value.

Wall Street's D-Day on Sept. 13 Brings High Stakes – 5 Stocks to Consider in the Aftermath

August’s Consumer Price Index (CPI) report, due to be released on September 13, 2023, holds immense significance as it will influence the Federal Reserve’s upcoming policy decision. The Fed’s decision on raising interest rates at the next FOMC meeting scheduled on September 19-20, 2023, could be a significant determinant of the market movement.

August’s CPI figures are important, especially after a surprising rise in prices in July, with the headline CPI rising 3.2% year-over-year, the first acceleration in more than twelve months. August’s inflation numbers would offer insight into whether inflation is easing and July’s rise in prices was a one-off.

The central bank had last raised rates by 25 basis points in late July, pushing the benchmark interest rate to the 5.25% - 5.50% range. The recent economic data has been mixed with the U.S. consumer spending in July rising the most in six months, and nonfarm payrolls increased by 187,000 in August.

However, the unemployment rate rose 3.8% in August, the highest since February 2022. Additionally, job openings edged down to 8.8 million, falling to their lowest level since March 2021. Towards the end of last month, Fed Chair Jerome Powell said that inflation is still too high and could require additional interest rate increases. However, he noted that policymakers would carefully proceed as they assess the incoming data.

A rise in energy prices is expected to have driven the increase in headline inflation last month. Economists forecast headline inflation to rise 3.6% year-over-year and 0.6% sequentially in August. Federal Reserve governor Christopher Waller said he currently sees nothing that would force the Fed to raise the short-term borrowing rates again.

In an interview with CNBC, he stated, “The biggest thing is just inflation. We got two good reports in a row.” The key now is to “see whether this low inflation is a trend or if it was just an outlier or a fluke.”

When asked if rate increases can stop, Waller said, “That depends on the data.” “We have to wait and see if this inflation trend is continuing. We’ve been burned twice before. In 2021, we saw it coming down, and then it shot up. The end of 2022, we saw it coming down, then it all got revised away.”

“So, I want to be very careful about saying we’ve kind of done the job on inflation until we see a couple of months continuing along this trajectory before I say we’re done doing anything,” he added.

The CME FedWatch Tool indicated a 93% probability of the Fed keeping interest rates unchanged in September, while there is just a 53.5% probability for another pause at the November meeting.

Usually, interest rates and the stock market have an inverse relationship. If the prices rise higher than expected in August, the Fed might be compelled to raise interest rates, which could hurt the performance of stocks. In this scenario, investors may consider investing in stocks that are less sensitive to inflation, such as Unilever PLC (UL), Dominion Energy, Inc. (D), and Thermo Fisher Scientific Inc. (TMO).

On the other hand, if inflation shows signs of easing in August, the Fed may keep the benchmark interest rate steady. This could help stock prices to rise. In this scenario, investors may consider investing in cyclical names like Microsoft Corporation (MSFT) and NIKE, Inc. (NKE). They are deemed cyclical due to their sensitivity to rising interest rates. Without rate increases, these stocks are likely to perform well.

Let’s discuss these stocks in detail.

Microsoft Corporation (MSFT)

MSFT develops, licenses, and supports software, services, devices, and solutions worldwide. The company operates in three segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.

On April 17, 2023, MSFT and Epic announced the expansion of their strategic collaboration to develop and integrate generative AI into healthcare by combining the scale and power of Azure OpenAI Service with Epic’s electronic health record (EHR) software.

MSFT’s corporate vice president of AI platform, Eric Boyd, said, “Our expanded partnership builds on a long history of collaboration between Microsoft, Nuance, and Epic, including our work to help healthcare organizations migrate their Epic environments to Azure. Together, we can help providers deliver significant clinical and business outcomes leveraging the power of the Microsoft Cloud and Epic.”

MSFT’s revenue grew at a CAGR of 14% over the past three years. Its net income grew at a CAGR of 17.8% over the past three years. In addition, its EBIT grew at a CAGR of 18.7% in the same time frame.

In terms of trailing-12-month gross profit margin, MSFT’s 68.92% is 43% higher than the 48.20% industry average. Likewise, its 48.14% trailing-12-month EBITDA margin is 432.7% higher than the industry average of 9.04%. Furthermore, the stock’s trailing-12-month Capex/Sales came in at 13.26%, compared to the industry average of 2.42%.

MSFT’s total revenue increased 8.3% year-over-year to $56.19 billion for the fourth quarter ended June 30, 2023. Its net cash from operations increased 16.8% year-over-year to $28.77 billion. The company’s net income increased 20% year-over-year to $20.08 billion. Also, its EPS came in at $2.69, representing an increase of 20.6% year-over-year.

Analysts expect MSFT’s EPS and revenue for the quarter ending September 30, 2023, to increase 12.5% and 8.8% year-over-year to $2.64 and $54.51 billion, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. The stock has gained 39.4% year-to-date to close the last trading session at $334.27.

Thermo Fisher Scientific Inc. (TMO)

TMO provides life sciences solutions, analytical instruments, specialty diagnostics, and laboratory products, and biopharma services.

On August 14, 2023, TMO announced the completion of the acquisition of CorEvitas, LLC, a provider of regulatory-grade, real-world evidence for approved medical treatments and therapies, from Audax Private Equity.

TMO’s Chairman, President, and CEO Marc N. Casper said, “CorEvitas expands our clinical research business with highly complementary real-world evidence solutions, which is an increasingly important area and will help to enhance decision-making as well as the time and cost of drug development.”

“We are excited by the opportunity to further accelerate innovation and advance productivity for our pharma and biotech customers in their new work to deliver new medicines and therapeutics to benefit patients,” he added.

TMO’s revenue grew at a CAGR of 18.4% over the past three years. Its net income grew at a CAGR of 15.6% over the past three years. In addition, its EBITDA grew at a CAGR of 15.5% in the same time frame.

In terms of trailing-12-month net income margin, TMO’s 13.14% compares to the negative 5.71% industry average. Likewise, its 24.43% trailing-12-month EBITDA margin is 373.9% higher than the industry average of 5.15%. Furthermore, the stock’s 10.09% trailing-12-month levered FCF margin is significantly higher than the industry average of 0.23%.

For the fiscal second quarter ended July 1, 2023, TMO’s revenues declined 2.6% year-over-year to $10.69 billion. Its adjusted operating income decreased 9% over the prior year quarter to $2.37 billion. The company’s adjusted net income declined 8% year-over-year to $2 billion.

Also, its adjusted EPS came in at $5.15, representing a decline of 6.5% year-over-year. On the other hand, its non-GAAP free cash flow rose 21.9% year-over-year to $1.26 billion.

Street expects its EPS and revenue for the quarter ending September 30, 2023, to increase 11.5% and 0.5% year-over-year to $5.66 and $10.73 billion, respectively. Over the past three months, the stock has gained 0.6% to close the last trading session at $518.27.

NIKE, Inc. (NKE)

NKE is engaged in the designing, marketing, and distributing athletic footwear, apparel, equipment, and accessories for sports and fitness activities. Its brand product offerings are in Running, Basketball, the Jordan brand, Football, Training, and Sportswear.

Over the last three years, NKE’s revenue grew at an 11.1% CAGR, while its EPS grew at a 26.4% CAGR during the same time frame. Its net income grew at a 25.9% CAGR over the past three years.

In terms of trailing-12-month gross profit margin, NKE’s 43.52% is 22.8% higher than the 35.45% industry average. Likewise, its 11.55% trailing-12-month EBIT margin is 58.7% higher than the industry average of 7.28%. Furthermore, the stock’s 7.56% trailing-12-month levered FCF margin is 49% higher than the industry average of 5.08%.

NKE’s revenues for the fourth quarter ended May 31, 2023, increased 4.8% year-over-year to $12.83 billion. Its gross profit increased 1.7% year-over-year to $5.60 billion. The company’s net income declined 28.4% year-over-year to $1.03 billion. In addition, its EPS came in at $0.66, representing a decline of 26.7% year-over-year.

Analysts expect NKE’s revenue for the quarter ended August 31, 2023, to increase 2.5% year-over-year to $13 billion. Its EPS for the same quarter is expected to decline 19.3% year-over-year to $0.75. It surpassed consensus EPS estimates in three of the trailing four quarters. Over the past three months, the stock has declined 8% to close the last trading session at $97.67.

Unilever PLC (UL)

UL is based in London, the United Kingdom. It operates as a fast-moving consumer goods company. Its segments include Beauty & Wellbeing, Personal Care, Home Care, Nutrition, and Ice Cream.

UL’s revenue grew at a CAGR of 5.7% over the past three years. Its net income grew at a CAGR of 12% over the past three years. In addition, its EPS grew at a CAGR of 13.2% in the same time frame.

In terms of the trailing-12-month EBIT margin, UL’s 16.32% is 106.7% higher than the 7.89% industry average. Likewise, its 18.29% trailing-12-month EBITDA margin is 60% higher than the industry average of 11.43%. Furthermore, the stock’s 42.06% trailing-12-month Return on Common Equity is 273% higher than the industry average of 11.28%.

UL’s turnover for the first half ended June 30, 2023, increased 2.7% year-over-year to €30.43 billion ($32.55 billion). Its operating profit rose 22.6% year-over-year to €5.52 billion ($5.90 billion). The company’s net profit increased 20.7% year-over-year to €3.88 billion ($4.15 billion). Also, its EPS came in at €1.40, representing an increase of 23.6% year-over-year.

In addition, its net cash flow from operating activities increased 10.4% over the prior-year period to €3.37 billion ($3.61 billion).

For the quarter ending September 30, 2023, UL’s revenue is expected to increase 4.7% year-over-year to $16.53 billion. Its EPS for fiscal 2023 is expected to increase 4.9% year-over-year to $2.89. Over the past year, the stock has gained 12.2% to close the last trading session at $50.45.

Dominion Energy, Inc. (D)

D produces and distributes energy in the United States. It operates through four segments: Dominion Energy Virginia, Gas Distribution, Dominion Energy South Carolina, and Contracted assets.

On September 5, 2023, D announced that it concluded a robust and competitive sale process and executed three separate definitive agreements to sell its three natural gas distribution companies to Enbridge (ENB). The three LDCs include The East Ohio Gas Company, Public Service Company of North Carolina, Incorporated, Questar Gas Company, and Wexpro Company.

D's Chair, President, and CEO, Robert M. Blue, said, “The transactions announcement also represents another significant step in our business review, which is focused on repositioning the company to create maximum long-term value for shareholders, employees, customers, and other stakeholders.”

D’s net income grew at a CAGR of 62.4% over the past three years. Its EBITDA grew at a CAGR of 3.5% over the past three years. In addition, its EPS grew at a CAGR of 69.4% in the same time frame.

In terms of the trailing-12-month gross profit margin, D’s 46.31% is 19.2% higher than the 38.86% industry average. Likewise, its 45.90% trailing-12-month EBITDA margin is 40.2% higher than the industry average of 32.74%. Furthermore, the stock’s 50.59% trailing-12-month Capex/Sales is 73.2% higher than the industry average of 29.20%.

For the fiscal second quarter ended June 30, 2023, D’s operating revenue increased 5.5% year-over-year to $3.79 billion. Its adjustments to reported loss came in at $131 million, compared to adjustments to reported earnings of $1.11 billion. Its reported income per common share came in at $0.69, compared to a reported loss per common share of $0.58 in the prior-year quarter.

Street expects D’s revenue for the quarter ending September 30, 2023, to increase 3.4% year-over-year to $4.53 billion. On the other hand, its EPS for the same quarter is expected to decline 32.6% year-over-year to $0.79. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past month, the stock has declined 4.4% to close the last trading session at $47.12.

Will Twilio (NYSE: TWLO) and Amazon (NASDAQ: AMZN) Redefine AI Potential with Their Unstoppable Alliance?

Last week, at the Amazon Web Services (AWS) Summit in New York, San Francisco-based cloud communication and customer engagement platform Twilio Inc. (TWLO) announced its strategic partnership with technology giant, Inc. (AMZN). Right on cue, the market welcomed the announcement with more than a 5% intraday gain in the former’s share price while surging by as much as 11.7% during the trading session.

The Partner

As a dominant player in the CPaaS (Communications-Platform-as-a-Service) market, TWLO provides businesses with the tools to integrate voice calls, text messages, and security verification tools into their software and apps to drive customer engagement by facilitating seamless and personalized interactions on demand. This empowers businesses to expand their customer base and communicate with clients across the globe.

While potential growth avenues for TWLO include expanding its CPaaS offerings and forging partnerships with other major tech companies, competition from established tech giants could impact the company’s operations and revenue generation. However, that concern seems to have been mitigated by TWLO’s artificial intelligence (AI)-fueled strategic partnership with AMZN.

The Partnership

The renewal of vows and strengthening of ties, which seeks to enhance the company’s predictive AI proficiency, has closely followed a vote of confidence from the tech giant in which AMZN announced that it has acquired 1% stake in TWLO earlier in the week with its ownership of 1.77 million shares worth more than $108 million.

The association between the two businesses started back in 2016 when TWLO began serving as a Marketplace partner for AWS, which had become the world's largest cloud infrastructure platform. It signed two deals with AMZN to directly integrate its communication tools into AWS, which enabled developers to easily add TWLO's voice calls, text messages, audio clips, and other features to their mobile apps.

Fast forward to June 2022, and TWLO revealed its CustomerAI, which adds a technology layer that integrates generative AI and predictive AI tools into the company's customer engagement platform.

According to Twilio CEO Jeff Lawson, who was employed with AMZN between 2004 and 2005, “With generative and predictive intelligence, Twilio’s high-quality interaction data, and Segment profiles working together, every experience can be highly personalized and tuned with a level of sophistication that was previously only attainable by the tech giants. With Twilio CustomerAI, brands can transform their customer relationships and unlock their full potential.”

The Heavyweight

Coincidentally, also in June 2023, AWS, in response to the recent noise around AI being made by frontrunner Microsoft Corporation (MSFT) and challenger Alphabet Inc. - Class A (GOOGL), announced an allocation of $100 million for a center to help companies use generative AI. This technology has captivated the public imagination and shaped the business narrative since OpenAI unleashed ChatGPT.

While $100 million might be an apparent drop in the bucket for a company with $64 billion in cash and half a trillion dollars a year in operating expenses, the investment acknowledges the significance of generative AI and the importance of being a part of the conversation.
AWS CEO Adam Selipsky insists that the AI trend is real. For AMZN, that momentum applies to its Bedrock generative AI service and its Titan models, as well as the new innovation center.

While it might seem that the company, which got a head start of no less than seven years over MSFT and GOOGL in the business of renting out servers and data storage to companies and other organizations, might be late to the generative AI game, Selipsky, echoing Amazon founder and longtime CEO Jeff Bezos, said the company has succeeded by listening to customers.

In fact, AMZN’s leadership in the cloud infrastructure market could give the company heft and mileage in the generative AI race. “AI is going to be this next wave of innovation in the cloud,” Selipsky said. “It’s going to be the next big thing that pushes even more customers to want to be in the cloud. Really, you need the cloud for generative AI.”

Moreover, according to Selipsky, AWS provides a measure of credibility in offering generative AI that eludes others in the space. He emphasized, “I can’t tell you how many Fortune 500 companies I’ve talked to who banned ChatGPT in the enterprise. Because at least the initial versions of it just didn’t have that concept of enterprise security.”

Bottom line

TWLO Senior Director of Product Alex Millet expressed his optimism around the company’s partnership with AMZN, “With AWS’ predictive AI technologies, we are rapidly developing AI-native features and APIs.” He further added, “We believe our tools will change the way marketers, contact centers, developers, and data teams deliver these world-class customer experiences.”

Hence, while the OpenAI-MSFT alliance is garnering attention and reaping the first-mover advantage with GOOGL scrambling to play catchup, the coalition of AMZN and TWLO has the potential to emerge as the dark horse in what AWS CEO has termed as a “10K race.”

Wall Street Giants Alphabet (GOOGL), Meta Platforms (META), and Microsoft (MSFT) Report Earnings this Week – Here’s the Game Plan

U.S. tech giants could indicate an end to the approximately year-long slowdown in their cloud businesses as recent signs of economic resilience encourage consumers to boost their tech spending. Also, a surge in digital ads would drive profits.

Wall Street’s leading tech companies, Google-parent Alphabet Inc. (GOOGL), Meta Platforms (META), and Microsoft Corporation (MSFT), are scheduled to report earnings this week, which will be a test to their elevated valuations and the broader market rally these tech giants have driven, thanks to optimism over artificial intelligence’s (AI) growth potential.

The Overall Consensus Estimates of Each Stock.

Analysts expect GOOGL’s revenue for the second quarter (ended June 2023) to come in at $72.80 billion, indicating an increase of 4.5% year-over-year. The consensus EPS estimate of $1.34 for the to-be-reported quarter reflects a 10.7% year-over-year improvement.

Furthermore, analysts expect GOOGL’s revenue and EPS for the fiscal year (ending December 2023) to increase 6.2% and 16.9% from the previous year to $300.31 billion and $5.33, respectively.

In the case of META, analysts expect revenue to increase 8% year-over-year to $31.12 billion for the second quarter that ended June 2023. The tech company’s EPS for the to-be-reported quarter is expected to rise 18.3% year-over-year to $2.91.

Additionally, META’s revenue and EPS for the fiscal year (ending December 2023) are expected to grow 8.9% and 37.5% year-over-year to $126.96 billion and $11.81, respectively.
For the fourth quarter that ended June 2023, analysts expect MSFT’s revenue to increase 7% year-over-year to $55.47 billion. The company’s EPS for the same quarter is expected to rise 14.4% year-over-year to $2.55. Moreover, it has topped the consensus EPS estimates in three of the trailing four quarters, which is impressive.

For the fiscal year 2023, the consensus revenue and EPS estimates of $211.34 billion and $9.67 indicate increases of 6.6% and 5% year-over-year, respectively. In addition, the company’s revenue and EPS for the next fiscal year 2024 are expected to grow 11.7% and 14.1% from the prior year to $236.10 billion and $11.03, respectively.

How Should Investors Approach These Stocks?

While the search engine is GOOGL’s flagship product, the company operates in key areas such as hardware, cloud computing, advertising, and software.

The tech giant, scheduled to report second-quarter 2023 results on July 25, surpassed analysts’ earnings estimates in the first quarter. GOOGL’s revenue of $69.78 billion beat analyst expectations of $68.90 billion, according to Refinitiv. Also, the company reported earnings of $1.17 per share versus $1.07 per share expected, according to Refinitiv.

In addition, GOOGL’s YouTube advertising revenue was $6.69 billion, compared to $6.60 billion expected, according to StreetAccount. The beat on the top and bottom lines breaks a string of four consecutive quarters in which the company missed the consensus estimates.

The company finally generated profit in its cloud-computing business during the first quarter. Its Google Cloud revenue grew 28.1% from the year-ago value to $7.45 billion. The unit reported an operating income of $191 million, following a $706 million loss in the same quarter of 2022.

“We are pleased with our business performance in the first quarter, with Search performing well and momentum in Cloud. We introduced important product updates anchored in deep computer science and AI. Our North Star is providing the most helpful answers for our users, and we see huge opportunities ahead, continuing our long track record of innovation,” commented Sundar Pichai, GOOGL’s CEO.

Due to intense pressure from the popularity of the AI-based chatbot ChatGPT, launched in November last year by Microsoft-backed Open AI, GOOGL launched its own AI chatbot called Bard during the first quarter of 2023.

GOOGL is making numerous efforts to incorporate “generative AI” into its products. On June 8, the company introduced the Secure AI Framework (SAIF), a conceptual framework for secure AI systems. SAIF is designed to help mitigate risks specific to AI systems, such as stealing the model, data positioning of training data, extracting confidential information in the training data, and injecting malicious inputs.

On May 25, GOOGL announced Search Labs, a new generative AI-powered program that enables users to access early experiments like SGE, Code Tips, and Add to Sheets. In the same month, the company unveiled the private preview of Duet AI for Google Cloud, an always-on AI collaborator to provide help to developers.

Furthermore, on May 18, GOOGL unveiled the private preview of Duet AI for Google Cloud, an always-on AI collaborator powered by generative AI. It offers real-time code suggestions, chat assistance, and customizable features designed for enterprise requirements.

Alphabet’s second-quarter results are expected to reflect profits from its strengthening cloud service offerings. The company’s growing investments in infrastructure, data management, analytics, security, and AI are the primary catalysts. While the Google Cloud segment would turn into a profit in the second quarter, the growth could slow down.

According to analysts polled by Refinitiv, GOOGL will likely report its lowest-ever growth for the cloud computing business at 24.4%. On the other hand, the recovery in the digital ad market would aid GOOGL significantly.

META is another tech giant set to report second-quarter earnings on July 26 after market close. With a $754.11 billion market cap, Meta, formerly known as Facebook, Inc., develops innovative products that allow people to connect and share with friends and family through mobile phones, PCs, virtual reality (VR) headsets, and wearables globally.

Meta’s products and services include Facebook, Instagram, WhatsApp, Messenger, and Quest 2.

Tech conglomerate reported better-than-expected revenue and earnings for the first quarter of 2023. META’s sales increased by 3% year-over-year during the first quarter, reversing a trend of three consecutive quarters of revenue declines and topping analysts’ estimates of $27.65 billion, according to Refinitiv.

Also, the tech company reported earnings of $2.20 per share, compared to the $2.03 per share expected by analysts, according to Refinitiv.

In addition, META’s user growth was relatively strong compared to previous quarters. META’s family daily active people (DAP) were 3.02 billion on average, up 5% year-over-year. Similarly, its family monthly active people (MAP) rose 5% from the prior-year quarter to 3.81 billion. Also, Facebook's daily active users (DAUs) were 2.04 billion as of March 31, 2023, up 4% year-over-year.

In the last quarterly release, Meta’s founder and CEO, Mark Zuckerberg, commented, “Our AI work is driving good results across our apps and business. We’re also becoming more efficient so we can build better products faster and put ourselves in a stronger position to deliver our long-term vision.”
Further, the company stands to benefit from its upcoming product launches, including Meta Quest 3, a cutting-edge virtual and mixed reality headset featuring higher resolution, improved performance, breakthrough Meta Reality technology, and enhanced comfort.

Also, on July 18, META introduced the availability of Llama 2, an open-source large language model, with Microsoft as its preferred partner. The companies believe that an open approach is the right one for developing today’s AI models, especially those in the generative space where the technology is advancing rapidly.

This month, Facebook owner Meta announced Threads, an app built by the Instagram team for sharing via text. Threads provide a new, separate space for real-time updates and public conversations. Creators and influencers are increasingly exploring this new app to bolster their online presence and help them reach bigger audiences.

Threads became the fastest-growing social media platform to hit 100 million users, a serious threat to the dominant microblogging Twitter app. This resulted in several analysts upgrading the META stock. If the application manages to retain users, Threads could achieve $5 billion in annual ad revenue, Bernstein said in a note on July 18.

On July 11, Morningstar analysts stated that Threads could add between $2 billion and $3 billion to META’s revenue annually between 2024 and 2024.

As a result of continued technological breakthroughs and innovative product launches, META issued a relatively bullish forecast for the second quarter of fiscal 2023, projecting total revenue of between $29.50 billion and $32 billion, exceeding analysts’ sales estimate of $29.50 billion, according to Refinitiv.

For META, revenue in the fiscal 2023 second quarter is projected to grow at its fastest pace in six quarters, driven by a significant pickup in the digital ad market as consumer spending remains robust.
Along with GOOGL, leading tech company MSFT is set to release its fourth-quarter and fiscal year 2023 earnings report on July 25. The company reported better-than-expected results for the first quarter of fiscal 2023.

During the third quarter, MSFT beat Wall Street’s revenue and earnings estimates, driven by growth in its cloud computing and Office productivity software businesses, and the software giant added that AI products were stimulating its sales.

MSFT’s revenue in the third quarter increased 7% year-over-year to $52.90 billion, surpassing analyst expectations of $51.02 billion, according to data from Refinitiv. The company reported earnings of $2.45 per share, beating analyst estimates of $2.23, according to Refinitiv.

During the quarter, the company’s growth at its cloud business Azure was 27%, exceeding analyst expectations for 26.6% growth, according to the consensus of 23 analysts polled by Visible Alpha.

Microsoft’s CEO, Satya Nadella, told investors on a conference call that the company will continue to focus on three priorities. First is assisting customers in using the depth of the Microsoft Cloud to get the most value out of their digital spend; second, investing to take the lead in the new AI wave across its solution areas. And third is driving operating leverage, aligning its cost structure with its revenue growth.

Satya Nadella added that the company has the most powerful AI infrastructure, which is being used by its partner Open AI and NVIDIA Corporation (NVDA), and other leading AI startups, including Adept and Inflection, to train large models. MSFT’s Azure OpenAI bright together advanced models like ChatGPT and GPT-4 with the enterprise capabilities of Azure.

The company has more than 2,500 Azure-Open AI service customers, and AI is integrated into a wide range of products, MSFT’s CEO said.

On July 18, MSFT announced that the company’s new corporate AI tools that work with Office software, Microsoft 365 Copilot, would cost $30 per user per month in addition to what most business customers already pay.

The pricing, announced at MSFT’s partners' conference, reflects solid demand for corporate AI products and the cost of running them. According to Chief Financial Officer Amy Hood, its new AI products might become the tech company’s fastest business to hit $10 billion.

While the company will likely surpass analysts’ earnings estimates in the to-be-reported fourth quarter, as it did in the first three quarters of 2023, however, Microsoft Intelligent Cloud, home to Azure, is estimated to grow at 13.7%, the slowest rate since 2017. Enterprises are optimizing their IT spending due to lingering macro challenges, thus impacting Azure and other cloud providers.

Meanwhile, last Friday, Goldman Sachs analyst Kash Rangan reiterated a Buy rating on MSFT and increased the price target to $400 from $350 after the company announced pricing and other details related to its Microsoft 265 Copilot offering.

Bottom Line

These tech giants have been at the forefront of cutting-edge research and developments in AI, Cloud, among others, integrating these powerful technologies into their products and services. With these companies flexing their muscles in Cloud and AI, they are well-posied for significant long-term growth.