Wall Street says Microsoft is poised for a big year

Because of his background on Wall Street, Jeff Bezos was able to talk investors into forgoing profits in favor of aggressive expansion when he was running Amazon.com Inc. In no small part because of that background, he had a knack for convincing investors to go after big ideas. Then what was the point, Bezos convinced them, if you weren't going after the big ideas, then what was the point? 

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Today, the top Wall Street whisperer does not work for Amazon, he works for Microsoft Corp. It is no surprise that, in the midst of the belt-tightening across Silicon Valley, where a relentless pursuit of growth has given way to a need to cut costs, this company, run by the slick visionary Satya Nadella, is being granted a special license in order to proceed at full speed.

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Microsoft's $10 billion investment in OpenAI has led to the unbridled excitement that surrounds artificial intelligence, which makes Microsoft appear to be leading the field. It is evident that the Street is not just hype about artificial intelligence, according to Wedbush analyst Daniel Ives, who argued that Microsoft would have a longer spending budget this year than its peers. 

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The mood of this week's Big Tech earnings has allowed Microsoft to stand out from the rest of the field; Wall Street is looking closely at the first hard numbers that the company has today; these numbers may provide insight into what Meta Platforms Inc. CEO Mark Zuckerberg has stated will be an "year of efficiency."

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There are early signs that Silicon Valley is indeed trying to cut back, and it appears to be doing so with increasing confidence. In spite of all four Big Tech companies reporting this week, Microsoft's shares were the only ones that soared because it had been building exciting new technology rather than protecting existing ones, not Meta, Amazon, nor Alphabet Inc.

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There has been the greatest gain for Meta shares, which has risen by a massive 98% since the beginning of the year. As a result, it continues a rally that began in October 2022, when it became evident that Zuckerberg had decided to scale back the metaverse vision he had cherished and cut back on his workforce. 

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However, research firm MoffettNathanson noted that Zuckerberg's belt-tightening wooed investors most, suggesting that Meta's business model is in better shape than had been feared. It has been reported that the revival of Meta's digital ads business gave investors hope that the company's business model is in good shape. According to its analysts, the company has achieved an unprecedented reduction in operating costs since the end of October that is the key to the stock's current level. 

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During the first quarter of this year, Meta revised its full-year expense guidance to between $81 billion and $87 billion, a significant downward revision from its earlier forecast of $94 billion to $99 billion. A total of 77,114 Meta employees have been hired, the lowest number since the end of 2021 and 12% lower than its peak in the past year. 

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It was also rewarded similarly as Amazon began to unwind its exuberant expansion of its logistics network during the lockdown era. As a result of eliminating 27,000 corporate employees and letting natural attrition in its warehouses take its course, the company's workforce had shrunk 10% from the same period last year. 

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It is evident that the company beat analysts' expectations on overall operating income, and its most significant cost savings were seen in its North American retail division, where operating income increased to $0.9 billion in the quarter, in contrast to a loss of $1.6 billion during the same period last year. Although Amazon's stock has continued to rise 31% since the start of 2023, concerns about the growth of cloud computing have held it back from bigger gains.

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Despite concerns over the fragility of their advertising business and fears that the company will become an also-ran in cloud computing compared with Microsoft and Amazon, Alphabet saw the slimmest gains from the week. As Alphabet has attempted to slim itself down, margin improvements have been harder to come by, and they have been largely due to the logistics costs associated with office closures and other related expenses. Operating income has declined by 13% in the past year.

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By shifting some of Google Cloud’s expenses to a different section of the income statement, the company was able to achieve profitability during the first quarter of this year. Even though the company pointed out that the workforce reductions would mostly be recorded this quarter, and that hiring was being "meaningfully slowed," the company's headcount has also never been higher. In comparison to all of its Big Tech peers, Alphabet has performed poorly so far this year, rising only 22% since the start of the year.

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It is worth mentioning that, at Microsoft, the metrics that would have raised a red flag for other companies have largely been ignored. Despite 10,000 job cuts, Microsoft's headcount has grown 9% year-on-year, and does not seem to suggest much reduction in headcount. Operating margins improved marginally during the January-March period compared to the same period last year, but they would have decreased if it weren't for an accounting change. Operating expenses were up by 7%. 

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There is no doubt that artificial intelligence is a promising technology, and it is taking the cloud by storm. Microsoft forecast cloud revenue growth to be 26% to 27%, with 1 percentage point contributed by AI services. This was that and more during the earnings call, where AI was mentioned more than 50 times.

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The CEO of Microsoft, Satya Nadella, understands that Google's dominance of search and the threat it poses to Amazon's cloud business, AWS, are key factors that will play a role in knocking down those two companies. Nadella is right to smell blood in its quest to topple Google's longstanding dominance, and he also thinks enhancements in AI can help it close the gap with AWS. 

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This week, Nadella told investors that Microsoft would manage its P&L carefully and focus on operating leverage. "We will not be shy about making investments where we need to make them to grasp long-term opportunities."

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Despite the UK's competition authority blocking Microsoft's mega deal to acquire games publisher Activision, the stock is set to end up up by around 6%. This is an amazing feat given Wednesday's shock announcement that the authority would block the mega deal to acquire games-maker Microsoft.

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There are few reasons why I should disagree with Wall Street’s belief that this is Microsoft’s year, as the company has been bringing desktop computing to the masses for over a decade and seems ready to make the same shift to artificial intelligence.