Azure
grew
31%
year
over
year
versus
guidance
of
28%
in
the
third
quarter.
Artificial
intelligence
contributed
7
percentage
points
of
that
growth.
Both
large
deals
and
the
number
of
deals
were
strong.
Management
commented
that
it
left
some
revenue
on
the
table
because
it
didn’t
have
enough
AI
capacity.
So
the
company
will
invest
heavily
next –
we
estimate
$15
billion-$20
billion
in
capital
expenditures,
bringing
the
year
total
to
as
high
as
$50
billion.
Chief
financial
officer
Amy
Hood
said
it
would
step
up
next
year
too.
Progress
on
Activision
Blizzard
integration.
Reports
suggest
Microsoft
is
going
to
raise
prices
for
Game
Pass.
Commercial
bookings
and
remaining
performance
obligation
growth.
General
demand
trends.
Microsoft
reports
early
in
the
cycle,
helping
to
set
the
tone
for
software
overall.
Results
from
last
quarter
were
generally
solid,
with
strength
in
large
deals,
good
bookings,
and
solid
RPO
growth.
Fair
Value
Estimate
for
Microsoft
With
its
3-star
rating,
we
believe
Microsoft’s
stock
is
fairly
valued
compared
with
our
long-term
fair
value
estimate
of
$435
per
share,
which
implies
a
fiscal
2024
enterprise
value/sales
multiple
of
12
times
and
an
adjusted
price/earnings
multiple
of
37
times.
We
model
a
five-year
compound
annual
growth
rate
for
revenue
of
approximately
13%
inclusive
of
the
Activision
acquisition.
However,
we
believe
macro
and
currency
factors
will
pressure
revenue
in
the
near
term.
We
believe
revenue
growth
will
be
driven
by
Azure,
Office
365,
Dynamics
365,
LinkedIn,
and
emerging
AI
adoption.
In
our
view,
Azure
is
the
single
most
critical
revenue
driver
over
the
next
10
years
as
hybrid
environments
(where
Microsoft
excels)
drive
mass
cloud
adoption.
We
believe
the
combination
of
Azure,
DBMS,
Dynamics
365,
and
Office
365
will
drive
above-market
growth
as
chief
information
officers
continue
to
consolidate
vendors.
We
believe
More
Personal
Computing
will
grow
modestly
above
GDP
over
the
next
10
years.
Read
more
about
Microsoft’s
fair
value
estimate
Key
Morningstar
Metrics
for
Microsoft
• Fair
Value
Estimate:
$435.00;
• Morningstar
Rating:
★★★;
• Morningstar
Economic
Moat
Rating:
Wide;
• Morningstar
Uncertainty
Rating:
Medium.
Economic
Moat
Rating
We
assign
Microsoft
overall
a
wide
moat
primarily
due
to
switching
costs,
with
network
effects
and
cost
advantages
as
secondary
sources.
We
believe
Microsoft’s
moat
will
allow
the
company
to
earn
returns
above
its
cost
of
capital
over
the
next
20
years.
We
rate
Microsoft’s
productivity
and
business
processes
segment
as
having
a
wide
moat
based
on
switching
costs
and
network
effects.
PBP,
representing
approximately
30%-35%
of
total
revenue,
consists
of
Office
365,
Dynamics
365,
and
LinkedIn.
Microsoft’s
intelligent
cloud
segment
includes
Azure,
OpenAI,
Nuance,
GitHub,
Visual
Studio,
Microsoft
Intelligent
Data
Platform,
Microsoft
Fabric,
and
Windows
Server,
SQL
Data
Base
Management
System.
We
assign
the
segment
a
wide
moat
based
on
high
switching
costs,
network
effects,
and
cost
advantages.
IC
represents
approximately
40%-45%
of
total
company
revenue,
with
Azure
representing
25%-30%
of
total
company
revenue,
or
two-thirds
of
the
segment.
Read
more
about
Microsoft’s
moat
rating
Financial
Strength
We
believe
Microsoft
enjoys
excellent
financial
strength,
arising
from
its
strong
balance
sheet,
growing
revenue,
and
high
and
expanding
margins.
As
of
June
2023,
Microsoft
had
$111
billion
in
cash
and
equivalents,
offset
by
$47
billion
in
debt,
resulting
in
a
net
cash
position
of
$64
billion.
Gross
leverage
is
at
0.5
times
fiscal
2023
EBITDA.
Our
base
case
assumes
that
revenue
grows
at
a
healthy
pace,
driven
by
Azure
public
cloud
adoption,
Office
365
upselling
efforts,
AI
adoption,
and
broader
digital
transformation
initiatives.
We
see
strong
margins
improving
further
over
the
next
several
years.
Free
cash
flow
margin
has
averaged
31%
over
the
last
three
years,
which
we
expect
to
improve.
Read
more
about
Microsoft’s
financial
strength
Risk
and
Uncertainty
Microsoft’s
risks
vary
among
its
products
and
segments.
High
market
share
in
the
client
server
architecture
over
the
last
30
years
means
significant
high-margin
revenue
is
at
risk,
particularly
in
OS,
Office,
and
Server.
Microsoft
has
been
successful
at
growing
revenues
in
a
constantly
evolving
technology
landscape,
and
it’s
successfully
moving
existing
workloads
to
the
cloud
for
current
customers
and
attracting
new
clients
directly
to
Azure.
However,
it
must
continue
to
drive
revenue
growth
of
cloud-based
products
faster
than
revenue
declines
in
on-premises
products.
Microsoft
is
acquisitive,
and
while
many
small
acquisitions
are
completed
that
fly
under
the
radar,
the
company
has
had
several
high-profile
flops,
including
Nokia
and
aQuantive.
The
LinkedIn
acquisition
was
expensive
but
served
a
purpose
and
seems
to
be
working
out
well
in
our
view.
It
is
not
clear
how
much
Microsoft
bought
in
the
Permira-led
Informatica
LBO,
and
it
may
have
been
an
important
strategic
investment,
but
Informatica
was
certainly
not
a
growth
catalyst.
GitHub
was
expensive
but
strategic
and
seems
to
be
shaping
up
as
a
success,
while
the
ZeniMax
deal
should
boost
the
company’s
first-party
video
game
publishing
efforts.
While
Nuance
was
not
hard
to
digest,
the
$69
billion
Activision
deal
was
completed
in
October
2023
and
will
likely
be
a
bit
more
involved.
Read
more
about
Microsoft’s
risk
and
uncertainty
MSFT
Bulls
Say
Public
cloud
is
widely
considered
the
future
of
enterprise
computing,
and
Azure
is
a
leading
service
that
benefits
the
evolution
first
to
hybrid
environments
and
ultimately
to
public
cloud
environments.
Microsoft
365
continues
to
benefit
from
upselling
into
higher-priced
stock-keeping
units,
which
should
continue
over
the
next
several
years.
Microsoft
has
monopoly-like
positions
in
areas
(OS,
Office)
that
serve
as
cash
cows
to
help
drive
Azure
growth.
MSFT
Bears
Say
Momentum
is
slowing
in
the
ongoing
shift
to
subscriptions,
particularly
in
Office,
which
is
generally
considered
a
mature
product.
Microsoft
lacks
a
meaningful
mobile
presence.
Microsoft
is
not
the
top
player
in
its
key
sources
of
growth,
notably
Azure
and
Dynamics.
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