Microsoft (MSFT +1.11%) is making headlines this week after its earnings release on Aug. 1. The company reported year-over-year revenue growth of 8% in its fourth quarter of 2023, earning $57 billion and beating analyst expectations by about $710 million.
The tech giant is making positive inroads in artificial intelligence (AI) and could be well-positioned to profit significantly from the market's development. However, it is important to be aware of the weak points of this business before you go all in on Microsoft.
So, here are the bear and bull arguments for Microsoft stock.
Bear: Declines in its gaming earnings
The last year has been challenging for countless tech companies, with macroeconomic headwinds causing reductions in consumer spending. Through it all, Microsoft remained profitable thanks to lucrative aspects of its business, such as cloud computing and its subscription-based Office productivity services. However, its gaming brand, Xbox, has suffered from consistently declining sales.
In fiscal 2023, Microsoft's gaming revenue fell 5%, driven by fewer Xbox console and content sales. The company reported an 11% reduction in consoles sold and a 3% decline in content purchased. The bright spot of the division was its Xbox Game Pass subscription service, which partially offset content declines with growth.
Microsoft's challenges in gaming seem to be a mixture of lingering effects from the COVID-19 pandemic that caused poor market conditions and repeated delays for some of its most-anticipated games. A lack of content pushed consumers toward its biggest competitor, Sony, which continued to release big titles.
The good news is that an Xbox Games Showcase in June indicated Microsoft could turn things around next year. At the event, Microsoft announced several new titles, including a new Star Wars game, an expansion to the popular game Cyberpunk, further details about the highly anticipated game Starfield, and much more. Most of the new content will release in 2024, strengthening Microsoft's long-term outlook and providing a light at the end of the tunnel for its Xbox brand. However, investors should know the segment could continue to falter until then.
Bull: A booming cloud business with Azure
Despite trouble in its Xbox division, the company seems well equipped to weather the challenges thanks to consistently growing businesses like its cloud platform Azure. On its 2023 earnings call, CEO Satya Nadella announced, "Microsoft Cloud surpassed $110 billion in annual revenue, up 27% in constant currency, with Azure ... accounting for more than 50% of the total for the first time."
The achievement comes as Microsoft has become a growing force in artificial intelligence (AI). The company is the largest investor in ChatGPT developer OpenAI, which has allowed it to procure exclusive licenses on several AI models and has bolstered Azure's client list.
According to Nadella, Azure Arc customers grew by 150% in 2023, attracting companies like Carnival and Domino's.
NASDAQ: MSFT
Key Data Points
Meanwhile, Azure AI added 11,000 new customers in Q4 2023, including Ikea and Volvo. Azure is also bringing ChatGPT to the masses with the help of Mercedes. The car manufacturer will offer ChatGPT as an in-car voice assistant, adding the service to more than 900,000 cars in the U.S.
Azure holds the second-largest cloud market share at 23%, only behind Amazon Web Services' 32%. However, Microsoft's 2019 investment in OpenAI has made it one of the first companies to enter the booming AI market, giving it a massive advantage over the competition. As Microsoft expands its AI offerings, it could snap up cloud share and eventually lead the industry.
Microsoft shares have gained 216% over the last five years, significantly more than Amazon's 47% in the same period. The difference suggests Microsoft is one of the most reliable ways to invest in AI and could be unstoppable with the help of OpenAI's technology.
