Important takeaways from Microsoft’s (MSFT) Q2 2024 report

Microsoft Corp. (NASDAQ: MSFT) this week reported record revenues for the second quarter, benefitting from the tech firm’s aggressive AI efforts and the strength of its cloud business. However, the stock slipped after the announcement as the management’s cautious guidance outweighed the impressive outcome.

The tech titan’s stock made strong gains ahead of the earnings and hit a record high, but pared a part of those gains later. On Wednesday, MSFT traded slightly above $400, staying well above the 52-week average. It is one of the best-performing Wall Street stocks that effectively navigated the recent market downturn. It is expected that continued innovation and the growing AI prowess will enable the company to stay on the high-growth path in the foreseeable future.

The Stock

Even after the steady gains of last year, the stock remains a good buying option for long-term investors, though some investors will find the valuation a bit too high. Interestingly, analysts unanimously recommend buying MSFT, citing the strong potential to return value to shareholders.

The company’s earnings exceeded estimates in almost every quarter in the past five years, and the trend continued in the most recent quarter. In Q2, net profit jumped 33% year-over-year to $21.87 billion or $2.93 per share. The strong outcome was driven by an 18% growth in revenues to $61.02 billion, thanks to the continued strong performance of cloud-based services.

Cloud Power

While there was broad-based growth across all business divisions in Q2, the Azure cloud segment did exceptionally well, with a 30% annual growth. Overall, the Intelligent Cloud unit expanded by 20% year-over-year. The only area that experienced slowdown is the Devices business which comes under the More Personal Computing business segment. The company ended fiscal 2023 with a cash balance of about $17 billion.

From Microsoft’s Q2 earnings call:

“Our commitment to scaling our cloud and AI investment is guided by customer demand and a substantial market opportunity. As we scale these investments, we remain focused on driving efficiencies across every layer of our tech stack and disciplined cost management across every team. Therefore, we expect full-year operating margins to be up 1 to 2 points year over year, even as AI capital investments drive COGS growth. This operating margin expansion excludes the impact from the Activision acquisition and the headwind from the change in useful lives last year.”

New Game

In a major deal that outshines all previous ones, Microsoft acquired video game publisher Activision Blizzard during the second quarter. Taking a cue from the positive response to Microsoft Copilot, a generative AI assistant that helps improve productivity and creativity, the company is introducing the chatbot as a stand-alone destination across all browsers and devices.

Microsoft’s shares traded lower throughout Wednesday’s session, extending the post-earnings weakness. It has gained a whopping 61% in the past twelve months alone.