Microsoft posts encouraging Q2 earnings and rallies 4% after-hours

After a difficult 2022, when its stock slumped 28%, Microsoft has posted its Q2 2023 results. Earnings beat market expectations and its cloud sector saw positive growth, but overall sales growth has dipped. With major job cuts on the horizon, investors will be watching how Microsoft stock reacts.

- Earnings of $2.32 per share beat analyst forecasts of $2.29 by 1.3%.

- Intelligent Cloud segment reaches $2.51bn, up 18%, but overall sales slow.

- Vanguard Information Technology ETF offers exposure to Microsoft and is up over 8% in 2023.

The Microsoft [MSFT] share price rallied 4% in post-market trading, with the company delivering its results for the second fiscal quarter (Q2) of 2023 after markets closed on 24 January.

The multinational tech giant announced better-than-expected adjusted earnings per share of $2.32 for the quarter ended 31 December 2022, beating the $2.29 forecast by analysts polled by Refinitiv.

However, revenues of $52.8bn were slightly below analyst forecasts of $52.9bn. The results reflected year-over-year growth of 2%, the company’s slowest quarterly uptick since 2016.

The company unveiled its earnings after finishing the day’s trading session with a 0.2% gain. Soon after, its share price reacted positively by climbing 4% in after-hours trading on Tuesday.

Elsewhere, Microsoft is making headlines for widespread outages on online services such as Outlook and Teams early Wednesday, with the company attributing the challenge to “networking configuration issues”.

Strong performance for the cloud

Investors will be hoping the company’s multibillion-dollar acquisition of California-based OpenAI, the company behind much-hyped AI chatbot ChatGPT, could help the company make up lost earnings from decelerating growth for its Azure cloud-computing platform.

Microsoft’s ‘intelligent cloud’ sector drove much of the company’s performance for Q2 2023, and brought in revenues of $21.5bn, representing growth of 18% year-over-year and beating analyst forecasts, according to Reuters and The Wall Street Journal.

Azure is part of this segment, and alone rose 31%, although this was a slight drop from 35% growth in the previous quarter.

The company’s ‘more personal computing’ segment – which includes revenues from Windows and Xbox – fared less well, posting a decline of 19% to $14.2bn. This seems to be an ongoing pattern, with revenues in this segment also down in the previous quarter.

Microsoft shares lost after-hours trading gains after chief financial officer Amy Hood announced that growth for Azure has been slowing down during the current quarter, suggesting that growth could drop below 30 percentage points.

Nevertheless, Microsoft’s acquisition of ChatGPT is likely to weigh in as a key growth lever for the company and its public shares. In a statement released with the Q2 earnings, chairman and CEO Satya Nadella highlighted the company’s commitment to helping its customers “innovate for the future in the new era of AI”.

Earlier this month, Gil Luria, managing director of investment bank DA Davidson, told Yahoo Finance the deal was potentially worth $600bn.

The outlook on Microsoft’s plans to buy video games developer Activision Blizzard [ATVI] for $68.7bn is less certain. As Opto reported earlier, the US Federal Trade Commission has challenged the deal, saying it harms competition, a claim that Microsoft denies, but competitors Sony [SONY], Alphabet [GOOGL] and Nvidia [NVDA] support. On the day of its earnings release, the tech giant served a subpoena to Sony, the maker of video game console PlayStation, as it prepares to defend itself in the lawsuit.

Hope for tech shares?

Diminishing investor sentiment pummeled tech stocks in 2022, which fell 30% compared to the overall market slump of 20%, according to Forbes. Microsoft’s share price fell by 28% across the year.

Last week, Microsoft said it is cutting thousands of jobs, with sources estimating the total will be 11,000 staff, or 5% of its workforce.

Dan Romanoff, an analyst at Morningstar, believes this is bad news for the wider tech theme, suggesting the “environment is not improving, and likely continues to worsen”.

Amazon [AMZN] last week also announced job cuts. CNBC reported layoffs are due to digital advertisers slashing budgets as customers stop spending in the face of growing inflation. Meta [META] and Alphabet are also reportedly cutting jobs.

However, not everyone sees Microsoft’s staff cuts as negative. “[It] shows a commitment to margin defence despite top-line shakiness,” according to a note written by analysts at Raymond James on 23 January and seen by CNBC. They rate Microsoft shares a ‘buy’.

Other experts also appear upbeat. “Given the challenges of the current macroeconomic environment… I think you have to consider these Microsoft earnings a reasonably positive sign for tech overall," said Bob O'Donnell of TECHnalysis Research.

Funds in focus: Vanguard Information Technology ETF

Microsoft is the second-largest holding in the Vanguard Information Technology ETF [VGT], with 18.12% of assets under management (AUM) as of 31 December. The biggest name in the fund is Apple [AAPL] with 20.42%. Despite being down 11.8% over the past year, the fund is up 8.2% since the start of 2023.

Other funds that offer exposure to Microsoft shares include the iShares Global Tech ETF [IXN]. As of 23 January, Microsoft was the second-largest holding, at 16.38% of AUM, with Apple again the largest, with 19.11%. IXN has performed similarly to VGT, having fallen 12.3% over the past year, but risen 9.3% in 2023 so far.

The Technology Select Sector SPDR Fund [XLK] seeks to correspond to the Technology Select Sector Index, which follows the performance of S&P 500 technology players. It also holds MSFT stock: again, the company sits in second place behind AAPL, with a 20.58% of AUM, relative to AAPL’s 22.36%. The XLK fund is down 10.5% over the past year, but up 7.9% in 2023 so far.