Microsoft flips negative after earnings, weighs on US100

Microsoft initially rallied after hours. Earnings numbers weren’t as bad as feared. The outlook isn’t as rosy though, and early strength gave way to weakness as guidance was issued. Microsoft’s underperformance is weighing on the US100.

A complete roundtrip for Microsoft’s share price in after hours trade. The initial optimism was spurred by the headline numbers.

• Adj. EPS $2.32 (vs exp. $2.30)
• Revenue $52.70bln (vs exp. $52.99bln)

Pretty much in line with expectations. But Microsoft expects growth to continue slowing for the rest of the year, a trend which has already started.

Take the Personal Computing segment for example. Slower PC demand has seen sales decline by 19% to $14.2 billion. For the next quarter, Microsoft is guiding that figure even lower, at $11.9-12.3 billion. Net income (essentially, profit) also fell by 12% to $16.4 billion.

Growth of the Azure cloud segment was constructive, but that’s expected to slow too. These comments from Microsoft CFO Amy Hood sum up the outlook:

“We exited Q2 with Azure growth in the mid-30s (per cent) in constant currency. And from that, we expect Q3 growth to decelerate roughly four to five points in constant currency. FX impact in Azure is about one point more than at the segment level. In our on-premises server business, we expect revenue to decline low single digits as demand for our hybrid solutions will be more than offset by unfavourable FX impact.”

“And in Enterprise Services, revenue should decline low to mid-single digits, driven by Microsoft Consulting Services. In More Personal Computing, we expect revenue of $11.9 billion to $12.3 billion. Windows OEM revenue should decline in the mid- to high 30s, in line with the PC market. We expect Q3 PC units to be similar to pre-pandemic levels.”

Lots of mentions of ‘decline’ in there. But declining from where? This is the trickiest thing for markets to interpret as the economy slows from high growth levels. What’s fair value? Microsoft is currently trading at roughly 25x forward earnings.

You can argue that they’re one of the strongest companies on the planet, and the continued growth of Azure (albeit at a slower rate) is likely to be supportive of valuation. But you can also argue that 25x forward P/E doesn’t offer much wiggle room if things don’t pan out as well as expected.

Perhaps that’s why the bears won the after hours duel. Let’s see what happens when the cash market opens in New York.

As one of the largest stocks in the index, the US100 is tracking overnight Microsoft developments. We can see the initial spike on the chart here around the time of Microsoft’s earnings followed by the subsequent weakness:

Microsoft, like Apple, has an outsized impact on the US100, at more than 11.5% of the index weighting. Tesla is just under 3% of the US100 weight. It’s their turn to report after the close tonight. Do recent price cuts represent demand weakness or a maturing, competitive company?