Microsoft (MSFT -0.64%), the second-biggest company in the U.S. when measuring market cap, has the power to shift markets with its performance. If Microsoft is struggling, it's a good chance others are too, thus dragging sentiment with it.
But Microsoft's first quarter of fiscal year 2023 (which ended Sept. 30) was a bit of a mixed bag, leaving investors looking for direction. As for Microsoft's stock, investors will need to dive into the good and bad parts of the quarter to gain a better understanding and determine if now is a good time to buy. So let's dissect Microsoft's report and find out.
The good: Azure continues to drive growth
Azure is Microsoft's cloud computing infrastructure wing. This segment has delivered impressive growth for years, and Q1 was no exception. Azure and other cloud service sales were up 35% year over year in Q1, making it the best-performing segment under Microsoft's umbrella.
Also outpacing Microsoft's average sales growth were Dynamics 365, Microsoft Cloud, and Server products and cloud services, all delivering greater than 20% growth. Overall, Microsoft grew quarterly revenue by 11% year over year to $50.1 billion. However, currency effects caused by the strong U.S. dollar created a five-percentage-point headwind for Microsoft; otherwise, Microsoft would have grown by 16% year over year.
The top-line growth wasn't enough to drive bottom-line growth, with earnings per share (EPS) falling 13% year over year to $2.35. But this drop comes with a caveat: Microsoft reported a net tax benefit during 2022's Q1. Without that factored in, EPS would have rose 4% in Q1 2023.
Overall, Q1 wasn't great, but it also wasn't bad. What might have some investors concerned was Microsoft management's outlook for the current quarter.
The bad: The outlook
Microsoft splits its company into three major divisions: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. It also provides guidance for each segment, giving investors insight into what management expects for the holiday quarter.
| Segment | Q2 FY 2023 Revenue Outlook (Midpoint) | Growth (YOY) |
|---|---|---|
| Productivity and Business Processes | $16.75 billion | 5% |
| Intelligent Cloud | $21.40 billion | 17% |
| More Personal Computing | $14.70 billion | (16%) |
Data source: Microsoft. YOY = year over year.
Overall, revenue is projected to grow about 2% year over year in Q2 to $52.85 billion -- a sizable miss compared to the average analyst Q2 guidance projection of $56.05 billion. One area where investors were truly disappointed is Microsoft's strongest segment: Azure.
Azure revenue growth is expected to be about 37% (in constant currency terms), meaning actual growth will be in the low 30% range. Investors can handle the ups and downs of Microsoft's More Personal Computing segment, as it will ebb and flow with consumer demand. Also, Productivity and Business growth slowing make sense due to companies controlling their spending.
However, Azure is not where investors want to see slowing growth, especially when a competitor is still projecting strong growth. Alphabet's Google Cloud saw its momentum increase in its Q3, and management was bullish on its prospects going into the final quarter of the year (equivalent to Microsoft's Q2).
Low 30% growth isn't anything to complain about, as few businesses as big as Microsoft are growing at that high a rate. Still, it's something to keep an eye on. At 24 times earnings, Microsoft's stock isn't exactly cheap, even if it seems that way from a historical perspective.
MSFT PE Ratio data by YCharts
There are some question marks with Microsoft right now, but I'm not worried. Business and consumer spending will likely ramp up once the economy begins to recover, boosting Microsoft as it deals with pent-up demand. However, if the current trend persists, I wouldn't be surprised if Microsoft's stock continues to struggle, opening up an investment opportunity for long-term investors to buy the dips that are likely to come over the short term.
