Welcome to HL's reimagined News, Insights and Research experience. Find out more

Share research

Microsoft - cloud beat expectations but costs to rise

Microsoft's second-quarter revenue rose 16% to $18.9bn, ignoring the effect of exchange rates...

No recommendation - No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Prices delayed by at least 15 minutes

Microsoft's second-quarter revenue rose 16% to $18.9bn, ignoring the effect of exchange rates.

More Personal Computing revenue rose 18%, including a double-digit helping hand from the Activision acquisition. Intelligent Cloud revenue rose 19%, with growth across server products and cloud services, driven by Azure revenue rising 28%. Azure growth was better than the market expected.

Operating profit rose 23% to $27.0bn, despite all costs increasing apart from general and administrative. Looking ahead, costs are expected to "increase materially" as the group invests in its AI capabilities.

The group generated free cash flow of $9.1bn in the quarter, not including the $65.0bn spent on acquisitions. Microsoft had net cash of $6.8bn at the end of December.

The shares were unmoved in after-hours trading.

View the latest Microsoft share price and how to deal

Our view

For all intents and purposes, Microsoft had a strong second quarter.

The software giant is now far more about cloud computing and AI than it is Excel and Word. So few companies can afford a seat at the cloud table that Microsoft's able to dig in. We're especially excited about Azure. AI services contributed a big whack of Azure's growth last quarter, and that's a trend we expect to continue.

Put simply, 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.

With that said, growth is expected to moderate slightly this year, despite being resilient in the grand scheme of things. End customers are likely going to trim spending while they ride out the economic storm. 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.

There are more strings to Microsoft's bow too. More Personal Computing is enjoying a very strong contribution from the recent acquisition of Call of Duty maker, Activision Blizzard. This is offsetting declines in physical hardware sales, reflective of the challenging consumer environment. While this trend plays out it's important to consider the growth levers available to Microsoft.

There's a lot to like. But huge advances like cloud and AI 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 inclusion 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.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

Latest from Share research
Weekly newsletter
Sign up for editors choice. The week's top investment stories, free in your inbox every Saturday.
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.

Our content review process
The aim of Hargreaves Lansdown's financial content review process is to ensure accuracy, clarity, and comprehensiveness of all published materials
Article history
Published: 31st January 2024