In my recent assessment of Microsoft’s performance since my last article in January, the stock has shown a slight positive total return against the S&P500. Despite this, my stance shifted to ‘Neutral/Hold’ after Q2 FY24 Earnings, resulting in a negative active return. However, I am upgrading my stance to ‘Buy’ due to Microsoft’s continued operational momentum and growth.
Microsoft’s Azure cloud platform is gaining ground against competitors such as Google and Amazon, with an increased market share over the past year. The company’s focus on Azure and Office 365 revenue mix is leading to ARPU growth, allowing for potential multiple expansions. I anticipate Microsoft’s Azure to surpass Amazon’s AWS as the leading cloud provider in the next 3-5 years.
Furthermore, the addition of Copilot and AI-related productivity enhancements across Microsoft’s product portfolio are driving price increases and ARPU growth. This steady growth in pricing, along with Microsoft’s focus on cloud services, may lead to long-term earnings potential and valuation expansion.
From a technical perspective, relative data on Microsoft vs. SPX500 signals a potential breakout in the weekly range, aligning with a ‘Buy’ rating. Microsoft Cloud’s revenue mix, primarily from Azure and Office 365, drives 56.7% of the company’s revenue. Although Azure contributes lower margins compared to Office 365, its continued growth may impact Microsoft’s overall gross margins.
Despite potential margin challenges, I remain optimistic about Microsoft’s future performance and position as a ‘Buy.’ I will continue to monitor key factors such as Azure revenue mix and gross margins to assess the impact on my thesis. Overall, I anticipate Microsoft’s focus on cloud services, price increases, and technical breakout to drive shareholder returns in the coming quarters.
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