Why you should also be obsessed with Microsoft: Morning Brief
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Winners are winners for a reason, something I have been reminded of a good number of times this summer.
The winner in focus today: Microsoft (MSFT).
I was reminded of Microsoft's winning ways in a phone chat with IBM's top CFO Jim Kavanaugh. In our brief time together, I asked Jim why his company's stock traded on a forward price-to-earnings multiple of 15 times (discount to the broader market) whereas Microsoft is north of 30 times (premium to the broader market).
IBM does cool stuff, I think, and is doing more of it increasingly in high-growth areas such as artificial intelligence and cloud computing. The company's lucrative consultancy business also had a very solid second quarter.
Kavanaugh acknowledged the valuation gap between the two tech icons and said it would close with a steady stream of consistent execution.
Perhaps that will happen.
But the exchange left an impression on me: While IBM fights to command a more premium valuation in a hot tech market, Microsoft's valuation will keep expanding. So why not continue to ride the Microsoft juggernaut as an investor?
Microsoft has winning momentum that is supporting higher profit estimates, higher valuation estimates, and higher cash flow estimates.
The first place to look for Microsoft's momentum is, naturally, AI.
Microsoft's reveal of its AI subscription pricing last week sent the stock to a new high — and with good reason, Jefferies veteran tech analyst Brent Thill explained.
"AI is already benefiting Azure results and this should only be the beginning given Microsoft's pole position in a decade-long industry evolution. Microsoft announced M365 copilot pricing of $30 per user/month, which reflects a 53-83% pricing uplift, far greater than the 15-30% previously thought," said Thill. "If just half of our conservative estimate of ~115 million E3 & E5 users adopt M365 copilot, M365 copilot could drive $20.6 billion in incremental revenue representing ~53% growth from FY23 O365 commercial revenue or ~10% upside to FY23 total revenue. Hence, we believe that M365 copilot could help double O365 commercial revenue in the next 4-5 years."
Those are huge potential financial statement drivers. Actually, they helped Microsoft set the stage for a major reset upwards of Street expectations, not unlike what Nvidia did a few months ago.
So there is all of that.
While Microsoft drives towards its AI future, the near term appears quite nice as well.
The company's cloud business Azure continues to hum as the economy enters a "steady state" period, as characterized to me in a chat with American Express CEO Stephen Squeri.
"Our recent CIO Survey showed stable, but muted, IT budget growth expectations for CY23. However, several forward looking indicators in the CIO survey support Microsoft's strong relative positioning within those muted CY23 budgets growth expectations, including Microsoft being the only software vendor in our survey for which forward growth expectations actually improved sequentially in our survey," Morgan Stanley analyst Keith Weiss pointed out.
Notice I haven't even dived into the possible material profit lift from the addition of Activision Blizzard. I am running out of room on this page but will simply say this gaming deal will be another big tailwind to Microsoft.
What can go wrong with this bull's dream story? Perhaps the economy falls off a cliff and Satya Nadella steps down as CEO in 2024.
But I don't see either happening.
And that means more winning for Microsoft
Brian Sozzi is Yahoo Finance's Executive Editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Tips on deals, mergers, activist situations, or anything else? Email brian.sozzi@yahoofinance.com.
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