Earnings Season Strategy for Star Companies | Which part of Microsoft's business will be the biggest highlight?

Since entering 2023, the NASDAQ index has risen by nearly 40%. This increase was mainly driven by several giant companies such as Apple and Microsoft. Now, in July-August, the traditional earnings season for US stocks has arrived. After a sharp rise, these giant companies are about to release their latest quarterly reports, and their stock prices may also have to withstand market tests.

Futu's financial calendar shows that after Tesla,$Microsoft (MSFT.US)$It will also release its earnings report on July 25, making it the second tech giant to release a financial report.On July 26 (Wednesday) at 5:30 Beijing time, there will also be a live broadcast of the results of simultaneous interpretation in both Chinese and Cantonese.Click to schedule a live broadcast of Microsoft's FY2023 Q4 results (simultaneous interpretation)

Earlier, we talked about the key points of interest in Tesla's earnings report. So, what do you think of Microsoft's earnings report? What indicators are likely to have a big impact on stock prices?Actually, the answer lies in Microsoft's development path over the past few years.

We know that if a company wants to grow and make more money, there are only two waysEither increase revenue or increase profit margins.There are clouds in the Three Kingdoms, and Wolong and Phoenix can secure the world once, so what if they have both?

Microsoft is the representative of this,Over the past five fiscal years, Microsoft has successfully achieved a transformation from being dominated by the PC system business to being dominated by the cloud computing business; at the same time, commercial businesses, including Office 365 office systems, have also transformed from a one-time sales business model to a SaaS model with a subscription system.

In the context of successful transformation, Microsoft's revenue has nearly doubled in the past five fiscal years, while net profit margin has more than doubled. The two are combined.Microsoft's net profit has more than tripled, far exceeding the revenue growth rate. Meanwhile, Microsoft's stock price has also risen 2.7 times since the end of fiscal year 2018.

Since Microsoft's success over the past five years comes fromSteady growth in revenue and continued improvement in profit marginsWell, the focus on Microsoft's earnings report still has to start from these two indicators.

Microsoft's current revenue is mainly divided intoThe following three blocks:

The first part is personal business.This can be said to be Microsoft's traditional business. Although it can provide steady cash flow, growth continues to slow, and there was even negative growth in the previous three fiscal quarters. Since the PC era has become a thing of the past, the market's expectations for this area are not high in the first place. Therefore, even if there is a decline, it may not have much impact on stock prices, so there is no need to pay much attention.

The highlight is that New Bing, with the support of ChatGPT,Is it possible to grab more market share from Google to expand search and advertising revenue.If Microsoft can achieve performance that exceeds expectations in this area, it may bring a positive signal to the stock price performance.

The second part is the intelligent cloud business.Azure, owned by Microsoft, is currently the cloud service provider with the second largest market share in the world. After Amazon's AWS, it is also the majority of Microsoft's current revenue. From FY2019 to FY2022, Microsoft's smart cloud business maintained a growth rate of more than 20%, and the growth rate continued to increase.

However, in recent quarters, Microsoft's smart cloud revenue growth rate began to decline, and the year-on-year growth rate in Q2 and Q3 of fiscal 2023 was less than 20%. As Microsoft's most important growth engine over the past five fiscal years,If revenue from the smart cloud business continues to decline, Microsoft's growth expectations will be very bad, and it will also put pressure on stock prices.

The good news is that Microsoft's breakthrough in the field of AI is also helping to upgrade the cloud business. Therefore, in the financial reports for the next few quarters, the focus of Microsoft's smart cloud business is on changes in the revenue growth rate.Let's see if we can reverse the slowdown in growth with the support of AI.

The third part of the business is productivity and business process business.Mainly commercial, we call it commercial business here. Of these, Office 365 subscription revenue accounts for the majority. The transformation of Microsoft's Office software service from a one-time sales permanent license method to a subscription system about 10 years ago can be said to be a very successful transformation of the business model.

The increase in revenue from the software subscription system is driven, on the one hand, by the increase in the number of customers, and on the other hand, by rising prices. Microsoft rarely raised prices in the past, and revenue growth was mainly driven by customer growth.

Since Microsoft's office system has a certain degree of monopoly characteristics and is very sticky, old customers hardly run away; almost any number of new customers can drive much growth. As a result, the growth of Microsoft's commercial business is very stable, and the growth rate has fluctuated around 15% over the past few fiscal years.

Now, this segment of the business is showing a very positive sign.The AI-supported CoPilot subscription product recently launched by Microsoft directly increased in price by more than two times after being integrated into Office. Microsoft may also usher in an accelerated growth curve compounded by product price increases compounded by new customers.You need to know that after Microsoft announced that the price of the Copilot subscription product exceeded expectations, the stock price surged 4% in a single day on July 18. It can be seen how much importance the capital market attaches to this product.

Therefore, the Copilot subscription situation for Microsoft's commercial business segment, and the resulting potential accelerated growth in commercial business, is the most important point worth our attention.Microsoft's commercial business may even replace the smart cloud business, become the biggest highlight of Microsoft's various businesses, and may also become the left and right hand in influencing stock prices.

Let's take another look at Microsoft's second focus, profit margins.Generally speaking, the final profit margin of an enterprise is mainly the net profit margin. However, in each financial report, Microsoft discloses only the operating profit margin for the three business modules separately. The operating profit margin is the net profit margin after deducting some income, expenses, and income taxes not related to the main business.

From the data for the past five fiscal years, we can see that the increase in Microsoft's operating profit margin is all-round.

Among them, the commercial business has the highest profit margin, and the improvement situation is also very stable. The personal business began to decline by a certain margin in FY2022. This is due to the impact of the industry cycle, and the market may not have expected much.

Worryingly, smart cloud profit margins also declined slightly in FY2022. Looking at the data for the last two fiscal quarters, this trend continues. In other words,The commercial business has become the main driver of profit margins, while the smart cloud business continues to lag behind.

The reason for the decline in the profit margin of Microsoft's smart cloud business is probably because the penetration rate of the cloud computing industry has reached a certain stage and competition among enterprises has begun to intensify, so Microsoft's pricing capacity may decline, and it is necessary to acquire customers through price cuts or increased sales promotion.

Therefore, in the next financial report, for the intelligent cloud business, we also need to pay attention to changes in operating profit margins.Let's see if products supported by AI can bring about improvements in competitiveness and bargaining power, thereby bringing positive changes to profit margins.

Of course, what is most anticipated is the Office business, where the average price of products is expected to be greatly increased due to the introduction of Copilot products.If the penetration rate of Copilot products can increase steadily or even rapidly, then the profit margin of Microsoft's commercial business will probably continue to reach a higher level, which will greatly boost the stock price.

Finally, let me sum it up. From Microsoft's successful transformation experience over the past few years, for Microsoft's financial reports, we need to focus on changes in revenue and profit margins in its three business segments.

Among them, the personal business is cash cows, but the market does not receive much attention. The smart cloud business was the engine of growth in the past. Now, revenue growth is declining and operating profit margins are declining. We need to observe whether Microsoft can reverse the decline in the smart cloud business in future financial data.However, Microsoft's commercial business, driven by Copilot products, is likely to see major changes in revenue growth rate and operating profit margin, and the impact on stock prices may also be greatest.