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Microsoft - better than expected cloud growth

Microsoft's revenue rose 12% in the first quarter, ignoring the impact of exchange rates.

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Microsoft's revenue rose 12% in the first quarter, ignoring the impact of exchange rates. More Personal Computing revenue grew slower at 2%. Intelligent Cloud revenue was up 19%, including a 28% increase in Azure and other cloud services revenue, which was better than expected. Next quarter, Azure revenue growth is expected to be 26-27%.

The group generated operating profit of $26.9bn, which was up 24%. Microsoft had net cash of $72.4bn as at the end of September.

The group acknowledged that "growth continues to be impacted by the overall market environments for recruiting and advertising, especially in the technology industry".

The shares rose 3.6% in pre-market trading.

View the latest Microsoft share price and how to deal

Our view

Microsoft came out the gate swinging last quarter. A resilient set of numbers highlights it's well placed to capitalise on the world's growing need for cloud solutions. So few companies can afford a seat at this table that Microsoft's able to dig in. We're especially excited about Azure.

With that said, growth is expected to moderate, despite being resilient in the grand scheme of things. End customers are likely going to trim spending while they ride out the economic storm, meaning blockbuster tech budgets are on the chopping block. The potential for Microsoft to do exceptionally well from generative AI remains, but the exact moment in time that this tech will be adopted at large will depend on when corporate spending picks up the pace, and confidence needs to improve before that can happen. Microsoft has a significant head start in the area though, and initiatives like copilots which aims to boost productivity at work, offer an attractive solution to businesses looking to improve margins in the tough climate.

For now, overall Cloud is picking up the slack from a marked slowdown in personal computing. This reflects the incredibly challenging consumer environment. Buying a new laptop and the software that comes with it is simply not a priority for many people. While this trend plays out it's important to consider the growth levers available to Microsoft.

Microsoft is top of the pack when it comes to the potential monetisation of AI. AI can be integrated into the majority of Microsoft's existing products, significantly raising revenue and margin ceilings in these areas. By doing this, the appeal of Microsoft's products should increase, which will help culminate in better pricing dynamics. This doesn't just apply to the ChatGPT side of things, Microsoft's own cloud security, analytics, productivity and storage offerings should stand to benefit as businesses seek to up their defences and workplace efficiency.

Huge advances like this often come with ups and downs and unpredictable competition dynamics. Regulatory risk is also a hurdle. The lack of intricate understanding in regulatory bodies increases the risk of impractical or damaging regulation coming into force, which is something that will need to be monitored closely.

Overall, we still think Microsoft is an enviable mashup of great businesses. It makes products we can't live without and owns an increasingly valuable stable of subscription-based products like LinkedIn and Office 365 Commercial. The recent acquisition of Activision Blizzard opens up a new frontier for gaming revenue potential, but we'd like a bit more detail on the growth strategy.

Despite taking on a hefty chunk of new debt, Microsoft's balance sheet is in rude health which helps it stomach ups and downs. Microsoft is a brilliant business with exciting growth prospects. The market expects a lot though so any missteps will be sorely punished.

Microsoft key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 25th October 2023