Microsoft (MSFT.US), the world's second-highest-capitalized public company after Apple (AAPL.US), saw its share price fall sharply during the after-hours trading session after announcing its results for the fiscal quarter ended December 31, 2021.
However, for the latest quarter of results, Microsoft is feeling good about itself:
Fiscal Second Quarter Revenue Increased 20.09% Year-over-Year to $51,728 Million; Gross Margin Increased 0.16 Percentage Points Year-over-Year to 67.21%,; Operating Margin Increased 1.46 Percentage Points Year-over-Year to 43.01%,01%; Net Profit Increased 21.35% Year-over-Year to $18,765 Million.
For the first half of fiscal 2022 ended December 31, 2022, Microsoft's revenue increased 20.96% year-over-year, up 17.53% from fiscal 2021 to $97,045 million; gross margin decreased slightly by 0.14 percentage points from the same period last year but improved by 1 percentage point from the first half of fiscal 2020 to 68.46%,; and operating margin was also higher than 37.99% and 42.10% in the past two years to 43.78% respectively. Half-year net profit increased by 33.77% year-on-year to $39.27 billion, an increase slightly lower than the 38.37% in fiscal 2021.
From the performance point of view, higher than the market's consensus expectations, from the perspective of business performance, Microsoft also believes that it will maintain steady development. So why did its stock price fall during the after-hours trading session when the results were announced?
I think there are several reasons: 1) increased profit-taking activity from tighter monetary policy; 2) some market doubts about its acquisition of Activision Blizzard (ATVI.US); and 3) a slight slowdown in growth in the cloud business, the most important growth driver. Let's analyze it one by one.
See High after adjustment
Wall Street's big tech stocks have continued to adjust this year, a trend that has intensified as the Fed's decision to tighten monetary policy approaches.
The three major U.S. stock indexes have fallen significantly, the Dow Jones index has fallen 5.62% year-to-date, the S&P 500 index has fallen 8.60%, and the Nasdaq, which has hit an unknown number of new highs since 2020, is also weak, with a cumulative decline of 13.46% year-to-date, indicating that technology stocks are weak relative to the broader market.
As one of the largest technology stocks, the decline in the stock prices of Apple and Microsoft is an important reason for the drag on the performance of the stock market.
Apple, whose cumulative increase has more than doubled in the past two years, has fallen by 10.02% this year, with a price-to-earnings ratio of 21.04 times based on the current market value of $2.61 trillion; the second largest market capitalization company, Microsoft, is an exception, with a cumulative decline of 14.22% since the beginning of this year, and its current market value of $2.17 trillion is equivalent to 30.43 times the net profit for the 12 months ended December 31, 2021, and the valuation is still higher than Apple, and its post-performance adjustment is not unreasonable.
Doubts about acquiring Activision Blizzard
On January 18, 2022, Microsoft announced plans to acquire Activision Blizzard, the world's largest third-party game developer, for a total cash consideration of $68.7 billion (including Activision Blizzard's net cash) for $95 per share. If completed, Microsoft would be the world's highest-grossing third-largest game company, behind Tencent (00700. HK) and Sony (SONY.US).
As of September 30, 2021, Activision Blizzard had cash and cash equivalents of $9,718 million and long-term interest-bearing debt of $3,607 million, meaning that the gaming company still had net cash of $6,111 million after paying off long-term interest-bearing debt in cash.
In other words, Microsoft may actually pay $62.589 billion, which is equivalent to about $80.35 per share, a premium of 22.88% to the closing price of $65.39 on the trading day before the announcement.
It is worth noting that a few hours after the release of the transaction, the two major COMPETITION regulators in the United States issued statements saying that they would seek public comment on the revision of the enforcement rules to strengthen the antitrust law. The more than doubling in the number of M&A filings between 2020 and 2021 is the backdrop to triggering regulators to strengthen antitrust.
Last month, regulators demanded that NVDA.US block NVDA.US's $82 billion bid for British chip design firm ARM. Recently, there are rumors that Nvidia is ready to abandon ARM's acquisition plan, and ARM's current majority shareholder, SoftBank, may accelerate ARM's IPO plan to alleviate financing problems. It can be seen that the resistance to the tightening of anti-monopoly supervision cannot be ignored.
In the face of stricter antitrust supervision, it is worth considering whether Microsoft's proposed acquisition of Activision Blizzard to become the third largest game company can make its dream come true.
In addition to antitrust concerns, synergies may also be a problem.
For the fiscal year ended June 30, 2021, Microsoft's total gaming revenue was $15.37 billion, an increase of 32.79% year-over-year, while Activision Blizzard's revenue for the 12 months ended September 2021 was $9.052 billion, an increase of 18.17% year-over-year.
Microsoft did not disclose the operating profit of the game business, but judging from the performance of its other personal computing business segments that include the game business, hardware devices such as Surface and Windows operating systems, patent licensing, etc., the profit margin is the lowest of its three business pillars, with an operating margin of 36.14% for the 12 months ended December 31, 2021, lower than the 46.83% of the productivity and business processing segment, and 44.22% of the intelligent cloud business. But slightly higher than Activision Blizzard's operating margin of 35.05% for the 12 months ended September 2021.
From these data, it can be seen that the revenue scale and growth rate of Microsoft's game business are better than Activision Blizzard, and with the consolidation of performance, the game business with lower profit margins may pull down Microsoft's overall profit margin performance.
Of course, the acquisition of Activision Blizzard is also good, with the integration of the game business, Microsoft's Xbox Game Pass competitiveness or be enhanced, especially if Microsoft will Activision Blizzard's popular game "Call of Duty" into an exclusive game, may greatly enhance the advantages of its game business, but this in turn has become a major reason for regulators to antitrust, and prevent the completion of the transaction.
Strengthening the layout of the metaverse through mergers and acquisitions may also be a motivation for Microsoft's mergers and acquisitions, but the profit predictability of the metacosm is still far away, and there are more uncertainties than determinable factors, and when the Fed collects water and causes the cost of funds to rise, the imagination of the capital market is also shrinking and becoming more pragmatic. This is also the reason why Activision Blizzard, which was acquired at a premium, has soared, while the share price of the acquirer Microsoft has continued to decline.
As you can see from the chart below, Microsoft's stock price has continued to decline since the announcement of the M&A transaction on January 18.
How did the latest quarterly performance really perform?
Founded in 1975, Microsoft's products include operating systems, cross-device productivity applications, server applications, business solution applications, desktop and server management tools, software development tools, and video games. Microsoft also designs and sells devices, including PCs, tablets, game and entertainment gamepads, other smart devices, and related accessories.
Microsoft presented performance by three main business segments:
1. Production efficiency and business processing: Office commercial version and commercial Skype, Office consumer version, LinkedIn, Dynamics business solutions;
2. Intelligent cloud computing: server products and cloud services, including Azure, SQL Server, Windows Server, Visual Studio, System Center and related customer access authorization (CAL) and GitHub; and enterprise services, including Premier Support Services and Microsoft Consulting Services;
3. Other personal computing: Windows operating system, cloud computing services and other commercial applications, patent licensing, Windows Internet of Things and MSN advertising; hardware devices such as Surface and personal computer accessories; games, including Xbox hardware and Xbox content and services; search ads.
As can be seen from the above figure, server products and cloud services, Office products and cloud services are the most important sources of revenue for Microsoft, and the growth rate is also relatively fast, although the game business represented by the yellow column has also increased significantly, but its proportion is obviously less than the above two major businesses.
See the chart below, the revenue of the intelligent cloud business has flourished in recent years, and the operating profit margin has continued to rise.
Azure is Microsoft's comprehensive cloud service that helps developers, IT professionals, and businesses freely create, configure, and manage applications on any platform or device.
Microsoft said that in the second fiscal quarter ended December 2021, Azure and other cloud services revenue increased by 46% year-on-year, driven by strong demand for consumer services, but as can be seen from the chart below, this growth rate has slowed from recent quarters.
In addition, at the results conference, Microsoft's chief financial officer pointed out that Azure will continue to be the locomotive driving the growth of its smart cloud revenue in the third fiscal quarter (the quarter ending March 2022), but she expects that the smart cloud revenue in the third quarter may be between $18.75 billion and $19 billion, and the author estimates that the annual growth rate may be 24.02% -25.68%, compared with the revenue growth rate of 25.52% in the second fiscal quarter. From the guidance point of view, the growth rate of intelligent cloud seems to have peaked.
In addition, the other two major businesses, production efficiency and commercial processing and other personal computing businesses, both showed lower growth rates in FY3 than in FY2, as shown in the table below.
The specific guidelines for the third fiscal quarter are as follows
In terms of production efficiency and commercial handling:
Office 365 will sustain healthy revenue growth as positive sentiment continues in fiscal Q2, but revenue from on-premises businesses is likely to decline by nearly 10 percent, primarily as customers continue to shift to cloud services.
Office Consumer Revenue grew by or nearly 10 percent, thanks to continued subscription growth for Microsoft 365 customers.
Strong growth in the job market is likely to drive about 30 percent growth in LinkedIn incomes.
Dynamics revenue was either driven by a rough 25 percent increase in Dynamic 365's growth.
Intelligent Cloud Business Aspects:
Azure's revenue growth will remain strong, while its single-user business should continue to be driven by the trend towards Microsoft 365 package usage, but at a more modest pace as the base expands. The local server business may have increased by less than 5%.
The increase in enterprise service revenue may be between 0-5%.
Other aspects of personal calculation:
While supply chain issues remain, pc (especially in the commercial sector) shipments continue to remain strong, which should favor OEM sales of Windows (i.e., agreements with vendors to pre-install Windows on new devices and servers), and Microsoft expects Windows OEM revenue to grow by nearly 10%.
Windows business products and cloud services, driven by demand for Microsoft 365 and upgraded security solutions, may increase by about 10%.
Surface's revenue should be able to maintain an increase of about 15%.
Search and new advertising revenue growth may be between 15% and 20%, underperforming in the previous year, mainly due to the strong recovery of the advertising market at that time.
In the game business, thanks to the more powerful functions of the new controller and the improvement of Xbox content and services, the revenue growth may be about 5%, but the gamepad sales will continue to be subject to the uncertainty of the supply chain. As for Xbox's content and services, revenue may be between 5% and 10%.
epilogue
From the above fiscal quarter 3 guidance, it can be seen that Microsoft's new quarter outlook, decent, not necessarily a surprise, but not too bad, so the reason for the funds to take advantage of the trend is very good.
More importantly, Microsoft's valuation is much higher than the market value of Apple, as we mentioned earlier for several reasons: the pursuit of higher returns to cover higher costs of capital, Microsoft's valuation further room for increase is relatively limited; whether Microsoft's acquisition of Activision Blizzard can succeed is doubtful, and although the long-term layout is of strategic significance, it is inevitable to encounter the pain of short-term profit weakening; coupled with the cloud business seems to have the suspicion of peaking growth, it also adds uncertainty to Microsoft's growth prospects. These factors may contribute to the outflow of funds.
Mao Ting