Microsoft Q2 - Dim Outlook For Cloud

Tech titan Microsoft reported its quarterly results on Tuesday night. Remember that the Redmond, Washington-based group has a diversified business that spans corporate and consumer software, cloud services, video game systems and even online advertising. It has over 220 000 employees lead by CEO Satya Nadella (pictured below).

Microsoft's best-known software products are the Windows line of operating systems, the Microsoft Office suite, and the Azure web-hosting platform.

Windows revenues have been soft, because people have been slowing down on new computer purchases. PC unit sales are 28% lower year-over-year. That was the main reason for Microsoft reporting operating profit for the quarter about 3% below Wall Street's forecasts, at $20.4 billion.

Azure, the cloud computing service that competes with Amazon's AWS, grew revenue by 31% year over year. That was good, but does reflect lower growth off a very large base. In my view this will be a temporary pause. Kash Rangan from Goldman Sachs has the same opinion, writing yesterday in a research note that "Azure customers may be optimizing their workloads (after a two-year pandemic spurt of migration), but our view that Azure is merely caught in a post-pandemic normalization phase, and we see accelerating Azure growth by the end of 2023".

As Michael reported in this newsletter recently, Microsoft plans to pay a whopping $10 billion for a major stake in OpenAI, the Sam Altman-led artificial intelligence company behind ChatGPT. Nadella has said that AI will lead Microsoft's next wave of super growth. Let's see how that turns out.

The share price of Microsoft rose after the earnings report hit the wires, then subsided after the earnings call. What really counts is the market reaction to earnings. On Wednesday they ended up 0.6% lower, which is not too bad.

We are happy holders of this high quality business.