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.

Shopify (SHOP) Unveils HOT AI Chatbot: Is it a 'Must' Buy?

On July 12, Canada-based e-commerce company Shopify Inc. (SHOP) unveiled its artificial intelligence (AI) assistant designed to help merchants with questions, thereby becoming the latest in the string of companies to implement such a feature.

The assistant, Sidekick, would be embedded as a button on the platform that can complete tasks for merchants and answer specific questions about their business, including queries on sales and order trends within a store. Illustrating the features through a video on Twitter, SHOP CEO said that the AI feature is “coming soon.”

Since the announcement, SHOP’s stock has gained about 6.9%, compared to a 2.9% rise during the month prior, at par with the S&P 500. However, is the feature worth the hype? Let’s find out.

AI is an umbrella term that is used to denote a series of programs and algorithms designed to mimic human intelligence and perform cognitive tasks efficiently with little to no human intervention.
However, unlike other next-big things, AI has been around for quite some time, influencing how we shop, drive, date, entertain ourselves, manage our finances, take care of our health, and much more.

However, the technology came into the limelight late last year with the release of ChatGPT, which in its own description, is “an AI-powered chatbot developed by OpenAI, based on the GPT (Generative Pretrained Transformer) language model. It uses deep learning techniques to generate human-like responses to text inputs in a conversational manner.”

The easily accessible chatbot that took the world by storm is one of the several use cases of generative AI, the subset of algorithms that creates and returns content, such as human-like text, images, and videos, based on the user's written instructions (prompts).

Including this subset, AI in its various forms and applications can analyze large volumes of data generated during the entire course of our increasingly digital existence and identify trends and exceptions to help us develop better insights and make more effective decisions.

Given its massive importance, it’s hardly surprising that Zion Market Research forecasts the global AI industry to grow to $422.37 billion by 2028. Hence, this field has understandably garnered massive attention from investors who are reluctant to miss the bus on such a watershed development in the history of humankind.

The Catch

Notwithstanding all the transformative qualities of AI, investors in SHOP would be wise to be aware of the caveats before FOMO drives them to buy like there’s no tomorrow and inflate a "baby bubble" growing in plain sight.

Microsoft Corporation (MSFT) has bet big on the technology by announcing a multiyear, multibillion-dollar investment deal with Open AI. MSFT’s rival, Alphabet Inc. (GOOGL), is in hot pursuit. With ubiquitous AI-enabled technology across its platforms, the company has unveiled its response to ChatGPT, called BardAI.

Chinese tech giant Baidu, Inc. (BIDU) has also followed suit with Ernie Bot., Inc. (AMZN) and Meta Platforms, Inc. (META) are also among the notable players in this dynamic domain. Alibaba Group Holding Limited (BABA), Zoom Video Communications, Inc. (ZM), and Databricks have all crowded this space with their own offerings.

Hence, while the technology is powerful (and useful, unlike most cryptocurrencies), the adoption is fast becoming so widespread that it remains unclear how it could help a specific business differentiate itself by developing enduring competitive advantages (read moats) and generating consistent profitability.

While AI is really good (and continually getting better) at predicting based on available data, it lacks contextual understanding. Since, in the words of Morgan Housel, 'things that have never happened before happen all the time,' it could be challenging for any AI tool to deal with tails, exceptions, and outliers in the shifting sands of business, economy, and society.

Even AAPL co-founder Steve Wozniak, who knows more than a thing or two about technology, agrees with the ‘A’ and not the ‘I’ of Artificial Intelligence.

Stick to Basics

Just as we have learned during the dot-com, cryptocurrency, real estate, and numerous other bubbles through the ages, markets can stay irrational longer than investors can stay solvent.

Therefore, even if the next big thing comes along and changes the world (and electricity, automobiles, personal computers, and the Internet really did), it is fundamentals that determine whether a business can survive to capitalize on those windfalls.

With inflation and rising interest rates expected to keep weighing on consumer spending, SHOP’s core activities in a softening market have been facing unrelenting pressure from competition on both livestream shopping and logistics fronts.

However, in a strategic U-turn, SHOP sold its logistics unit, which it had spent years building out, including last-mile delivery startup Deliverr, its largest acquisition ever, to supply chain technology company Flexport. Moreover, on May 4, SHOP announced that it would be laying off 20% of its workforce in addition to the 10% it let go last July.


Rather than getting too carried away and stretching an improvisation that keeps the business at par with the competition to frothy excesses with unrealistic expectations, it would be wise for investors to evaluate SHOP based on its fundamentals and prospects.