Education Series: Single-Stock ETPs

Microsoft Posts its Slowest Growth in Five Years

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Software giant Microsoft Corp. (NASDAQ: MSFT) has entered the new fiscal year, reporting earnings for Q1 2023 after the closing bell on the 25th of October 2022, missing its guidance, but beating analysts’ revenue and EPS expectations.

Here are the most important numbers from the report:

Revenue: $50.1 billion, up 11% from the year-ago period, vs. $49.7 billion expectation and vs. 22% growth a year ago. This marks the weakest quarterly sales growth in five years for Microsoft.

Net income: $17.6 billion, down 14% from a year ago (profits in the prior year quarter included an unusual $3.3 billion tax benefit). In the first three months of fiscal 2023, net profit dropped to $17.56 billion from $20.51 billion in Q1 2022. The latest number came in above the market’s projection.

Diluted earnings per share: $2.35 down 13% from $2.71 in the comparable period of last year, versus $2.29 expected.

The company returned $9.7 billion to shareholders in the form of share repurchases and dividends in Q1 2023 which is 11% down from Q1 2022.

Microsoft revolutionized information technology with the Windows operating system, said a declining PC market, macroeconomic headwinds, geo-political tensions, continued supply chain challenges, and a strong U.S. dollar are slowing Microsoft’s revenue growth numbers, alongside softer demand.

Divisional results:

The company is organized into three equally sized broad segments: Productivity and Business Processes (legacy Microsoft Office, cloud-based Office 365, Exchange, SharePoint, Skype, LinkedIn, Dynamics), More Personal Computing (Windows Client, Xbox, Bing search, display advertising, and Surface laptops, tablets, and desktops), and Intelligent Cloud (infrastructure and platform as a service offerings Azure, Windows Server OS, SQL Server).

Productivity and Business Processes: The segment posted $16.5 billion in revenue, up 9%, versus 22% growth a year ago, beating analysts’ estimates.

More Personal Computing: Revenue from the segment totalled $13.3 billion, down slightly, versus 12% growth a year ago. Revenue from sales of Windows licenses to device makers dropped 15% from the prior year, steeper than any quarter since 2015 and worse than the outlook CFO Amy Hood gave in July for a decline in the high single digits. The company said the PC market continued to deteriorate during the quarter.

Microsoft isn’t the only company feeling the impact of the decline in PC sales. Shares of Intel, AMD, and Nvidia, which produce chips used in PCs, plummeted this year. From their recent all-time highs Intel has collapsed 64%, AMD is down 66% and Nvidia is off 68%.

Intelligent Cloud: $20.3 billion, up 20%, far lower than the 31% growth the segment saw a year ago, showing that sales have slowed from their pandemic driven highs. Azure growth fell to 35% in Q1 versus 50% in the same quarter last year. Intelligent Cloud business is the firm’s big revenue driver and has been one of the cornerstones of the company’s growth over the past few years. For the first time, revenue in the quarter from Intelligent Cloud exceeded 50% of overall company revenue.

Guidance for FY23 Q2:

Microsoft offered soft guidance which fell short of expectations for its Q2 2023, while also lowering the FY 2023 revenue outlook. The company sees $52.35 billion to $53.35 billion in revenue for the fiscal second quarter, which implies 2% growth at the middle of the range, while analysts’ expectations were for revenue of $56.05 billion.

“Our outlook has many of the trends we saw at the end of Q1 continue into Q2,” Amy Hood told analysts. Those trends include weaker PC demand, which impacts Windows OEM, lower advertising spend, which affects LinkedIn revenue, and high energy costs abroad, which cut into Microsoft’s cloud business margins. Hood said higher energy costs are causing about $250 million in extra expense each quarter this fiscal year. The materially weaker demand for PCs seen in September will continue to affect its consumer business. Microsoft is forecasting a Windows revenue from device makers to decline in Q2 2023 in the high 30% mark. Clearly macro-economic pressures continue to weigh on the company’s performance, which are unlikely to be exhausted within the next quarter.

Results of the big technology firms are seen as a key factor determining market sentiment, with September’s quarter disappointing reports and guidance from Big Tech so far this week, giving investors reasons to worry.

From a technical perspective:

The share price enjoyed a strong rally since March 2020 but after reaching an all-time high of $347.69 in November 2021, the stock lost its positive momentum and reversed course. From its record high to its most recent low the share price lost more than 37%. After the release of its quarterly earnings report the stock took a hit plunging more than 6% on Wednesday. We expect further weakness to unfold in the short-term as investors are resetting expectations. Although, we don’t think this is the start of a multi-quarter painful guidance reduction cycle, and we do continue to like the stock over the long-term, neither fundamentals, nor technicals are suggesting that the current down trend is approaching an inflection point. The daily and weekly momentum indicators are in bear market ranges, pointing to further weakness in the coming months. While rebounds are inevitable along the way a decline to the down trend channel line crossing at $211.00 is the first potential downside target. Over the medium-term, we see levels to $200.00 as achievable.

Active traders looking to gain magnified exposure to Microsoft may use our 3x Long Microsoft ETP to take advantage of expected short-term rebounds, and our -3x Short Microsoft ETP to capture expected short-term declines.

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

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Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.

Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.

Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.

Violeta Todorova

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Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.

Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.

Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.

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Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.

He joined LS from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.

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