Michael Cox writes about lifestyle issues, popular culture, sports and technology. In a career spanning more than 10 years, he has contributed to dozens of magazines, books and websites, including MSN.com and "Adobe Magazine." Cox holds a professional certificate in technical communications from the University of Washington.
Greetings from rural Midwest. Pictured is the American Broadband fiber inventory for a new market we are in the process of launching. More details on that launch in a few weeks as we bring fiber goodness to unserved and underserved homes and businesses.
This has been a very busy couple of weeks with insightful earnings news from many companies. We are going to do our best to sort through 10+ hours of earnings calls and focus on a few questions we think were left unanswered.
In the previous Brief, we discussed AT&T’s and Verizon’s earnings. After that Brief was published, the remaining eight companies (including each of the Fab Five) reported earnings. For the Fab Five, reaction was positive across the board – even Meta/ Facebook added to their market capitalization. Over the last two weeks, the Fab Five have added $687 billion in value with 99% of that coming from Apple, Amazon, Microsoft and Alphabet. Cumulative Fab Five losses, which peaked at $2.7 trillion in June, are now a trillion less.
The Telco Top Five had more of an intra-company realignment rather than large-scale movement. Over the last two weeks, they have lost $7 billion in total market capitalization with $24 billion in Comcast and Charter losses offset by $17 billion in T-Mobile and Verizon gains (re: Verizon took their stock price haircut three weeks ago). Comcast has lost $55 billion in market capitalization this year and now trails T-Mobile in total value. Interestingly, T-Mobile is only $8 billion away from taking the “most valuable company” spot from Verizon.
While the discussion of the Telco Top Five has a distinctively US-focused bent, the Fab Five are more closely linked to the global recovery. With the dollar remaining at record highs (see the Bloomberg dollar index measure here, dollar to yen index from Yahoo here and the Wall Street Journal dollar to euro exchange rate history here), earnings continue to require constant currency adjustments. Each of the Fab Five are likely keeping significant currency stores abroad and borrowing in US dollars as necessary to fund daily operations.
Not much funding is needed thanks to large cash balances for each of the Fab Five. The following chart was posted to our online-only interim Brief post (here) and reflects the net debt for each of the Fab Five from 2Q 2021, 4Q 2021, and 2Q 2022:
Negative net debt shrank by about $92 billion over the four quarters ending 2Q 2022, with $24 billion coming from Meta/ Facebook. While each of the Fab Five have share buyback plans, it does not appear that accurate market capitalization losses have triggered the action of taking on additional debt to buy back shares. These corresponding drops would seem to indicate that foreign repatriation of funds has slowed to a crawl, but the situation is not dire.
Each of the Fab Five generates plenty of cash to continue their businesses generally unabated; provided that there is no forecasted long-term recession (even with all of the back and forth on our current economic state, no one is predicting long-term economic declines).
A strong cash position is also good for quick execution of acquisitions. As we discussed in the last Brief, Amazon is looking to supplement its health care portfolio with their $3.1 billion One Medical acquisition, and last Friday they announced the acquisition of the Roomba parent, iRobot for $1.7 billion (including debt, announcement here). If only the FTC would cooperate with a quick approval (more on the FTC’s activities with respect to Amazon and Meta in this Bloomberg article).
One other use of cash (copious amounts in this instance) is buying up rights to selected games in various sports. Apple has been on a tear with Major League Soccer (MLS – 10 year term – $2.5 billion – takeaway from ESPN) and Friday Night Baseball (term unknown, but multi-country streaming rights), while Amazon snagged Thursday Night Football from Fox (NFL – 11 year term – price ~$11 billion) and NBC expanded their Sunday Night Football rights with Peacock streaming and Telemundo Deportes broadcast rights (NFL – 11 year term – price ~$20 billion).
The biggest prize, however, is the NFL Sunday Ticket. We have discussed this in a few Briefs, and expect Apple to take the prize with somewhere between $2.5 and $3.0 billion per year (Dylan Byers has a good summary of the Apple advantage in this Puck article). The question then becomes term – will the NFL make the contract concurrent to the existing deals, locking in a marquis global streaming and distribution partner? Will Apple then turn around and strike an exclusive streaming distribution deal for commercial locations (e.g., with AT&T or Verizon)?
One of the nice things about September is that it features the start of the NFL season (Sept 8 – Buffalo Bills at the Los Angeles Rams) and also the annual Apple iPhone and other hardware announcements. Whether Tim Cook could have a special “one more thing” depends on Apple’s appetite to spend for these rights. We think that Apple will expand their audience because of this deal and will also step up their distribution agreements with rural and suburban fiber providers to convert as many satellite Sunday Ticket customers as possible.
Finally, many of you have asked about price increases in the communications space and the potential persistency of our current wage-price trend. As I have discussed with many of you, when you own a part of a rural broadband provider with legacy operations in Alaska, Nebraska, and Louisiana, certain commodity prices drive regional economic outlooks. In Louisiana (Lake Charles), natural gas is very important. Here’s the price of natural gas going back to 1997 from the U.S. Energy Information Administration:
Natural gas is at a 14-year high with annual price gains in the 75-80% range. Heat for many homes and businesses, particularly in the Midwest, comes from natural gas. This will impact real estate costs for a broad array of service providers this winter, particularly hospitals, commercial offices, and delivery vehicles that have converted to natural gas. While we do not have time to go into heating oil and propane, prices have increased on par with their natural gas counterparts (more here).
In Nebraska, corn drives the economy. Here’s that chart :
In early 2021, as the world was beginning to think about a post-COVID economy, corn shot up from the COVID-low $3-$3.50 per bushel to $5-$6 per bushel. That has served as an effective floor for the last two harvests. Like petroleum, corn is an essential ingredient in many foods. The 6-7 years of persistently low prices seems to have been broken, and, while that has many Nebraska farmers happy (especially if fertilizer prices continue to decline from their accurate highs), it’s not a good sign for long-term inflation.
This is not a commodity blog, but to answer several of your questions, there’s no sign from the heartland using petroleum, natural gas, propane/ heating oil, or corn prices that we are in a transitory phase. It’s time to think about 4-6% annual inflation, at least for several years. (And, for those in Alaska who look beyond petroleum costs, check out the price trends of various shell fish from the Alaska Department of Fish and Game here – yikes!).
There’s a lot to unpack from the second quarter earnings calls. To use space and print as effectively as possible, we will spend this Brief and the next attempting to explain and answer four questions:
There are many more questions to think about, but these are the big multi-company/macro questions in our view.
Question #1: How can cable mobile/ broadband bundling succeed?
Most of the cable companies have reported earnings, and mobile bundling success/ opportunity was at the top of the list. Nearby is the chart showing net additions for each cable company since each launched MVNOs.
To date, using 2.4 devices per home (a lower figure than we would use for a traditional wireless provider), Comcast and Charter have penetrated approximately 3.2% of their total passings with wireless. Comcast’s wireless offering turned five years old this quarter, and Charter’s will turn four years old next quarter. If the tables were turned, and we were examining penetration of a new fiber provider in a Charter or Comcast territory, would 4% (or even 24%) be acceptable for the business case? Cable’s performance in wireless has been plodding patient (no subsidies or crazy offers), but can they afford to wait much longer?
Comcast and Charter don’t emphasize triple play bundles any longer. Digital phone has been deselected in favor of mobile (finally). Programming costs continue to rise, and YouTube and Hulu now define skinny bundles (and skinny margins) even as they redefine the advertising world. Both companies would rather have broadband from a new passing than an incremental revenue generating unit (RGU) of video at an existing home.
Mobile is a slightly better gross margin business for traditional cable companies than video (although nowhere as good as digital phone). Tom Rutledge, Charter’s CEO, has gone so far as to (rightly) redefine his company as one of the largest wireless companies in the world. Why has market share been so elusive?
Charter’s COO, Chris Winfrey, addressed this issue on their earnings call in response to a question from Peter Supino, saying that Charter has struggled with bridging the gap between household (stationary) revenues versus device-driven revenues.
“So nothing to announce today, Peter, but clearly, we think a lot about mobile and its ability not only to attach to existing Internet customers, which has been the predominant path so far. But, as the market understands better our product, the fact that it is the fastest mobile product in the country and that it’s real, that it really does save customers a lot of money, no contracts, no taxes, no fees, I do think there’s a really powerful case that we can use mobile to actually drive significant Internet net adds and particularly in the market with low volume to be able to kick start in volume in the marketplace by using mobile to do just that.
So we’re constantly testing different concepts in the marketplace. Economically, it’s a no-brainer and it makes a lot of sense, but it is a new package structure for educating customers to get them to think about buying a household service and an individual service together so that they can get those savings and they can get that better product, and that may take a little bit of time for us to find the right connection as well as to educate the marketplace.”
Spectrum Mobile is a very strong product when it is paired with a broadband connection that customers value. With their network provider (Verizon) now in market with a $30/ month price point (albeit with the 5th line), is the bloom off the rose? Can cable play defense and offense at the same time?
We believe strongly that cable can win 25% share if they combine switching with the introduction of new (Apple) devices. Aggressive device promotion (via aggressive trade-in credits and perhaps a free speed upgrade) will win the day but Charter and Comcast need to commit to the short-term financial risk. They also need to Strengthen their unserved base marketing once they get a new offer in place. Running Spectrum Mobile spots during unused ad inventory is fine at the beginning, but the business is entering its fifth year.
Most of the same points above can be made for Comcast or even Altice (who is now growing at pre-Sprint rates and appears to be off to a good relationship with T-Mobile). One additional point for Comcast would be to at least match Spectrum’s growth rate – for 12 out of the last 14 quarters, Spectrum has outpaced Comcast on net additions with six million fewer households passed.
Question #2: How aggressive will (holiday) promotions be for the rest of 2022?
Times are going to be tight for 40-50% of consumers heading into the Holiday selling season. Salesforce published their predictions for the Holiday season late in June – it was chock full of interesting data. One important data point: 51% of consumers plan to spend less in the 2022 holiday season than 2021.
They make several predictions:
While we aren’t sure that all of these are applicable to the communications industry, we definitely think that the first three predictions could shape the attractiveness of one broadband or wireless carrier over another.
Both Verizon and AT&T suggested in their earnings calls that increased content bundling is “on the table” for the fourth quarter. T-Mobile already has a terrific Tuesdays app that gives stuff away for free (including 20 cent gas discounts at Shell – our personal favorite). Charter and Comcast, with their new joint venture, could actually provide away a free television (with set top box already included) for the right contract term and product mix.
These are all good, but the real “free” to most consumers is devices, particularly the iPhone. Or, even better, the Phone + Apple Care. How that is accomplished within the boundaries Apple places on carrier pricing remains to be seen, but we have a feeling that many teams are working on the solution at each company. We think that we may soon see the most competitive wireless device environment in the last decade, one which will spawn switching and likely lead T-Mobile to market capitalization leadership. More on that the next Brief.
Until then, if you have friends who would like to be on the email distribution, please have them send an email to [email protected] and we will include them on the list (or they can sign up directly through the website). Enjoy the rest of August and go Royals and Sporting KC!
WHAT IS IT ABOUT?
We’re getting together to talk about landing a tech internship, which is often the gateway into a long-term career in the industry. Our panel of experts will answer the following key questions:
1. Why should you participate in a tech internship?
2. What is the internship application cycle / timeline?
3. Where do you find internships? What should you look for?
4. What are the differences between paid/unpaid? Internships/apprenticeships?
5. How do you stand out from the crowd with your application and actually get the job?
WHAT IS THE FORMAT?
We’ll have a quick introduction followed by guest presenters covering the questions above. Then we’ll switch over to brief, moderated Q&A.
WHO IS PRESENTING?
We’ll have a panel of expert presenters from industry-leading tech companies, including recruiters and engineering voices. Check the link below for the specific companies and names.
DO I HAVE TO BE AN EXPERT? A STUDENT?
No and no. This Meetup is open to all who are interested and is meant to be an introduction to the topic.
HOW DO I ATTEND?
We will be holding this as a virtual Meetup event. RSVP at the Meetup Link below to get the Zoom link.
Despite July's Teams outage, Microsoft has been busy releasing new features and apps, including a more sensibly named Polls app for quick surveys rather than Forms.
Forms, which Microsoft set free for consumers in 2020, isn't going away. But on Teams, the Forms app is being replaced with a new app called "Polls" via Microsoft Forms, with a Teams-branded icon.
Microsoft says in its July Teams update blogpost that the Polls app will make it easier to find and add polls to chats and meetings.
SEE: Want a happy team at work? Make sure you don't forget this vital ingredient
The Polls user interface allows users to re-position the list of suggested polls from the bottom to the side of the pane. It also provides a doorway to the polls portal page where users can show or hide them in the side pane. And now Polls shows a view of the poll results rather than only showing the voting view, as it previously did. This lets the poll creator see how the poll looks to the audience after it's set live.
Polls also provides a list of recently created polls to make re-use easier. Previously, poll creators had to make a new one from scratch each time. There's also a new purple halo animation that appears to users after a vote has been successfully submitted.
Microsoft has added a "Rating" as a new poll question type ,so users can respond to a five-star scale and see an aggregate score of overall ratings for a given question.
Microsoft has published a support page explaining how to install and use the new Polls app for Teams.
"Since November 2020, you had to add a tab—the Forms app—to your meeting to use polls in Teams meetings. Now you'll add a new app called Polls as an option for your meeting tab. The experience of preparing, launching, and evaluating polls via the Polls app will be the same as the previous experience via the Forms app," it states.
Microsoft had planned to integrate LinkedIn profiles with Teams in April, but it appears to have been delayed by a few months. It's for one-to-one chat and provides LinkedIn work profile details about the person. Users can also add new LinkedIn contacts within Teams.
SEE: How to make meetings effective and useful: 6 ways to actually get stuff done
Users will be able to view a colleague's LinkedIn profile from Teams chat, channels, calls, or meetings.
Microsoft this month built on June's introduction of a collapsible right panel for Teams on the iPad for meetings. Now, Teams on the iPad is more able to adjust automatically to size, app orientation, and display modes. The app bar and canvas automatically align based on the screen size available to the Teams app.
Microsoft in February unveiled a new-look set of 1,800 emojis for Teams based on Microsoft's Fluent Design principles. It also included a handful of 3D emojis. But they have't been universally popular. Several users have complained on Microsoft's Teams update blogpost that they're "horrible" and "off-putting".
Microsoft designers said at the time the new emojis were unveiled that they are an extension of our humanity and not frivolous play things.
"Because being playful or highly expressive doesn't come easily to everyone, emoji are the perfect little helpers. Far from being frivolous or ornamental, they're extensions of our own humanity and an important communication tool."
provides the strategists; marketers and senior management with the critical information they need to assess the global digital advertising market as it emerges from the COVID-19 shut down.
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The report covers market characteristics; size and growth; segmentation; regional and country breakdowns; competitive landscape; market shares; trends and strategies for this market.It traces the market’s history and forecasts market growth by geography.
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The report covers the following chapters
Introduction and Market Characteristics - Brief introduction to the segmentations covered in the market, definitions and explanations about the digital advertising market.
Key Trends - Highlights the major trends shaping the global digital advertising market. This section also highlights likely future developments in the market.
Global Market Size and Growth_ Global historic (2016-2021) and forecast (2021-2026), and (2026-2031) market values, and drivers and restraints that support and control the growth of the market in the historic and forecast periods.
Regional Analysis - Historic (2016-2021) and forecast (2021-2026), and (2026-2031) market values and growth and market share comparison by region.
Market Segmentation- Contains the market values (2016-2031) and analysis for segmentation by platform, by ad format and by industrial vertical.
Regional Market Size and Growth - Regional market size (2021), historic (2016-2021) and forecast (2021-2026) and (2026-2031) market values, and growth and market share comparison of countries within the region. This report includes information on all the regions Asia-Pacific, Western Europe, Eastern Europe, North America, South America, Middle East and Africa and major countries within each region.
Competitive Landscape - Details on the competitive landscape of the market, estimated market shares and company profiles of the leading players.
Key Mergers and Acquisitions - Information on accurate mergers and acquisitions in the market covered in the report. This section gives key financial details of mergers and acquisitions, which have shaped the market in accurate years.
Market Opportunities And Strategies - Describes market opportunities and strategies based on findings of the research, with information on growth opportunities across countries, segments and strategies to be followed in those markets.
Conclusions And Recommendations - Includes recommendations for digital advertising providers in terms of product/service offerings, geographic expansion, marketing strategies and target groups.
Appendix - This section includes details on the NAICS codes covered, abbreviations and currency codes used in this report.
1) By Platform: Mobile Ad (In-App And Mobile Web); Desktop Ad, Digital TV; Other Platforms
2) By Ad Format: Digital Display Ad; Internet Paid Search; Social Media; Online Video; Other Ad Formats
3) By Industrial Vertical: Media And Entertainment; Consumer Goods & Retail Industry; Banking; Financial Service & Insurance; Telecommunication IT Sector; Travel Industry; Healthcare Sector; Manufacturing & Supply Chain; Transportation And Logistics; Energy; Power; Utilities; Other Industrial Sectors.
Companies Mentioned: Google; Meta Platforms, Inc. (Facebook); Amazon.com, Inc; Microsoft Corporation; Alibaba Group Holdings Limited
Countries: China; Australia; India; Indonesia; Japan; South Korea; USA; Brazil; France; Germany; UK; Russia
Regions: Asia-Pacific; Western Europe; Eastern Europe; North America; South America; Middle East; Africa
Time-series: Five years historic and ten years forecast.
Data: Ratios of market size and growth to related markets; GDP proportions; expenditure per capita; digital advertising indicators comparison.
Data segmentations: country and regional historic and forecast data; market share of competitors; market segments.
Sourcing and Referencing: Data and analysis throughout the report is sourced using end notes.
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“I can’t tell you in particular which part of that was some of the partner transition work we’re doing versus macro, it certainly feels like both,” Microsoft CFO Amy Hood said on the earnings call Tuesday.
Microsoft Chief Financial Officer Amy Hood said “partner transition work” had a negative effect on growth with small and midsize business customers during the tech giant’s latest quarterly earnings, another apparent sign that partner program changes this year have not only had an impact on partners’ businesses, but business for Microsoft itself.
During an earnings call Tuesday for the Redmond, Wash.-based tech giant’s fourth fiscal quarter and full fiscal year 2022 – which ended June 30 – Hood said “moderation” in small and midsize business (SMB) deals had a negative effect on paid Office 365 commercial seats, the Enterprise Mobility + Security business and Windows commercial products and cloud services revenue.
All of those business segments still grew overall year over year, Hood said.
[RELATED: MICROSOFT EARNINGS: SLOW PARTNER PROGRAM CHANGE ADOPTION ATE INTO ON-PREMISES REVENUE]
During the question-and-answer portion of the call, Hood said that Microsoft saw “some weakness in new deals, particularly in the SMB segments” that buy licenses other than E5, a license type aimed at larger businesses.
She also credited the weakness to macroeconomic factors – including the U.S. economy, which appears headed for a recession – along with the transition from Open Licensing to Microsoft’s Cloud Solution Provider program mentioned on the company’s earnings call in April.
Licenses aimed at SMB customers are “primarily sold through partner(s), and so we need to make sure we‘ve got the best value props but got to make sure the price is right, offer’s right and make sure that we are tuning that value prop to what small business customers need today, which is great value,” Hood said on Tuesday’s call.
“We’ll keep executing that through partner(s). We’re in the middle of that transition we talked about last quarter, and we’re still working on it,” she added.
She continued: “That is a spot where you tend to see macro weakness show itself … while I can’t tell you in particular which part of that was some of the partner transition work we’re doing versus macro, it certainly feels like both. And so that’s certainly a spot that we’re watching.”
Paid Office 365 Commercial seats still grew 14 percent year over year, driven by SMBs and frontline worker offerings, Hood said on the call.
But “growth was impacted by some moderation in new deal volume outside of E5 (licenses), particularly in the small and medium business customer segment,” Hood said during the earnings call Tuesday.
The installed base for Microsoft’s Enterprise Mobility + Security platform “grew 21 percent to over 230 million seats with some impact from the small and medium business deal moderation noted earlier,” she said.
She continued: “Windows commercial products and cloud services revenue grew 6 percent and 12 percent in constant currency, lower than expected due to some impact from the small and medium business deal moderation noted earlier.”
Hood expects to see “growth moderation in our small- and medium-sized business segment” continue into the next quarter, although Microsoft’s “differentiated market position, customer demand across our solution portfolio and consistent execution across the Microsoft Cloud should drive another strong quarter of revenue and share growth” overall, she said.
CRN has asked Microsoft if the Open Licensing to Cloud Solution Provider (CSP) program transition is related to the company’s “new commerce experience” (NCE) roll out this year that has proved controversial among partners – and whether NCE has caused some of the negative effects Hood talked about on Tuesday and in April.
Partners have spoken out against a 20 percent premium Microsoft added to monthly commitments of software packages including Microsoft 365, which was rolled out under the NCE banner earlier this year.
Partners allege that the premium punishes customers that need month-to-month commitments due to fluctuating employee counts or fear of going out of business. Partners also allege that the premium pushes customers to annual commitments – preventing customers from leaving a managed service provider (MSP) in the middle of a commitment and possibly leaving partners on the hook if a customer goes out of business or doesn’t need as many Microsoft licenses. Partners are also locked in with the distributor they used for an annual license commitment.
Microsoft partners and customers have had to buy new M365 subscriptions under NCE since March. In June, Microsoft indefinitely delayed an end date for partners to renew subscriptions bought before the NCE roll out.
Partners are now Preparing for a second major change to the partner program – the introduction of partner capability scores used to determine who is a Microsoft “solutions partner” – a replacement for Microsoft’s classic Gold and Silver partner designations – and receives certain benefits from the tech giant.
The scores go into effect in October, but partners can continue to renew legacy benefits under the outgoing Gold and Silver system even after October.
Microsoft’s revenue for the quarter ended June 30 was $51.9 billion, up 12 percent year over year. Net income was $16.7 billion, up 2 percent year over year, according to the company.
Microsoft Cloud revenue was $25 billion, up 28 percent year over year. Commercial bookings grew 25 percent, according to the company.
Revenue was hit by an unfavorable foreign exchange rate, according to the company. Production shutdowns in China that continued through May and a June “deteriorating PC market” had a negative effect on Windows original equipment manufacturer (OEM) revenue, resulting in a loss of more than $300 million for the segment, a decrease of about 2 percent year over year, according to Microsoft.
That OEM loss contributed to flat growth in Microsoft’s “more personal computing” segment, which saw revenue increase $270 million in the quarter, an increase of 2 percent year over year.
Microsoft’s “intelligent cloud” segment saw revenue increase $3.5 billion, or 20 percent year over year, due to Azure, cloud services, consumption growth and enterprise support services.
The company’s “productivity and business processes segment” revenue increased $1.9 billion, or 13 percent year over year. Drivers included LinkedIn, Dynamics 365 and Office consumer products, according to Microsoft.
Microsoft recorded operating expenses of $126 million as a result of significantly scaling down operations in Russia with the country’s ongoing war in Ukraine, according to the company.
Regardless, Microsoft stock was up 4 percent to $261.90 in after-hours trading Tuesday.
The company spent $113 million in employee severance expenses due to a “strategic realignment of our core business groups,” according to Microsoft.
Although it occurred after the quarter ended, Microsoft confirmed to CRN earlier this month that a “small number of employees” were let go due to a “strategic alignment,” but that the tech giant still plans to “grow headcount in the year ahead.”
Microsoft also recently confirmed to CRN that it has cut open jobs in its Azure, security and other business segments.
Microsoft (NASDAQ:MSFT) is widely considered a bond-like, safe-haven investment due to its incredible business moats, robust financial performance, rock-solid balance sheet, and humongous capital return program. However, Microsoft has lost ~25% of its market cap in 2022 as treasury yields have surged higher on tighter monetary policy. In today's note, I run Microsoft through my Quantamental analysis process and TQI valuation model to see if it's undervalued or overvalued and to determine if it is a good long-term buy at current levels.
While we will be focusing on numbers and charts in this note (and not the business per se), you can find my view on Microsoft's business and my investment thesis through my past coverage of the company (latest first):
Before we build out an absolute valuation for Microsoft, let's quickly analyze Microsoft's fundamental, quantitative, and technical data.
In the digital era, technology is ubiquitous, and Microsoft has built incredible business moats in its humongous serviceable addressable markets, including Cloud, Enterprise Software, Gaming, etc. Over the last twelve months, Microsoft raked in revenues of $192.5B, with Q1 growth coming in at a healthy level: 18% y/y. Riding high on the strength of its cloud infrastructure business [in addition to other solid growth in other business lines], Microsoft’s financial performance has gone from strength to strength for several years now.
In addition to robust revenue growth, Microsoft’s margin profile is getting stronger with each passing quarter. For Q1 2022, Microsoft recorded gross and operating margins of 68% and 41%, respectively. As you may know, these are best-in-class numbers.
Whilst recording healthy growth numbers at this massive scale, Microsoft is also generating incredible steady-state TTM FCF margins of ~33%. It is fair to say that Microsoft is a cash printing machine. In the last twelve months alone, Microsoft generated free cash flows of $63.65B. Due to a net cash balance of roughly $55B (cash hoard), Microsoft’s management has adopted an aggressive capital return program, which constitutes massive stock buybacks and a healthy dividend.
The threat of a global recession is rising; however, Microsoft could continue to deliver sales and profit growth in the coming years (albeit at a slower pace). According to consensus analyst estimates from YCharts, Microsoft’s revenues are set to grow from $198B in 2022 to $258B by 2024 at a CAGR rate of ~14%. During this period, Microsoft’s [EBITDA] margins are expected to Strengthen by another ~200 bps, and projected earnings are set to outpace projected revenue growth.
While the fundamental outlook for Microsoft’s business looks rosy for now, things could change rapidly if we do end up in a deep economic recession (as the FED raises interest rates and implements QT to curtail inflation by lowering aggregate demand). According to accurate news reports, Microsoft is slowing hiring amid economic uncertainty (and it cut some jobs too in accurate days). In my view, this news is evidence that Microsoft’s business is not immune to economic recession. At this point, I do not believe Microsoft’s financial projections will be met in a recessionary environment. Over the coming quarters, we may see weakening fundamental data from the company.
Now, let’s switch gears and analyze some quant factor grades for Microsoft.
According to SA’s Quant rating system, Microsoft is rated as a “Hold”; however, SA Authors and Wall Street analysts remain bullish on the counter. While Microsoft has maintained an “A+” rating on Profitability, its Growth, Revisions [earnings], and Momentum ratings have been worsening over the last six months. Additionally, the improvement in Microsoft’s Valuation rating is just a result of negative price action. Overall, a cumulative quant factor grade of 3.37/5 puts Microsoft firmly in the “Hold” territory.
Since the Fed’s pivot in November 2021, Microsoft’s stock has been sliding lower in a downward wedge pattern. As you can see below, Microsoft is currently trading well below its 50-Day moving average, a level it has traded above during its bull run over the last few years.
After a ~25% drop in 2022, Microsoft’s stock appears to be forming a base on the weekly chart, with an upward trending RSI. Also, volumes have been trending lower, which could be viewed as a sign of seller exhaustion. Technically, Microsoft seems ripe for a near-term bounce. However, the downward trend that started in late 2021 is still intact and based on valuations, Microsoft’s stock may have more downside in the medium-term. Talking of valuations, let us now try to determine the absolute intrinsic value of Microsoft.
To find the fair value and expected return of Microsoft, we will use TQI's Valuation model with the following assumptions:
|2022E revenue (conservative estimate)||$198B|
|Forward 4.5-Yr Revenue Growth Rate (%)||10%|
|Terminal Growth Rate (%)||3%|
|Optimized FCF Margin (%)||33-35%|
|Discount Rate / Required IRR (%)||10%|
|Exit Multiple [P/FCF]||15-25x|
Despite using a lower discount rate (10%) than TQI's required IRR for GARP stocks (15%), Microsoft's stock comes out to be slightly overvalued. The valuation moderation in Microsoft's stock has brought its P/FCF multiple back to its 5-year median P/FCF. However, there is more room on the downside and no real upside for Microsoft's trading multiples.
In one of my previous articles, I outlined the logic behind Microsoft's valuation moderation, and frankly speaking, the accurate surge in treasury yields warrants further moderation in Microsoft's trading multiples. With the economy potentially headed towards a recession, Mr. Market is irrationally pricing Microsoft as a risk-free asset. While I think Microsoft is one of the strongest businesses on this planet, it is not immune to a recession (and Morgan Stanley seems to agree with my view, according to this news report).
Why would anyone buy Microsoft at an FCF yield of 3.21% when the 2-yr treasury is yielding 3.15%? (and that too in the face of an impending recession)
Well, I don't have a good answer for this question, but let's take a look at Microsoft's expected returns to see what an investor could realistically generate from here with Microsoft.
Assuming a P/FCF multiple of ~20x in 2026 (inverse of long-term average interest rates of 5%), Microsoft would generate just a 6% price return from current levels over the next 4.5 years. Hence, Microsoft's stock looks like dead money to me. So far, we haven't included Microsoft's capital return program in our analysis, and this is a good time to do so.
As you may know, Microsoft has lots of cash on its balance sheet, and it is generating tons more in free cash flows every quarter. In accurate years, Microsoft has implemented an aggressive capital return program that includes dividends and stock buybacks. While we have discussed this program (and its potential) in great detail in the past (report), I think that if Microsoft's $68.7B deal to buy Activision Blizzard (ATVI) goes through, the buyback program will be somewhat smaller than my initial estimation. Here's what I expect from Microsoft's buyback program over the coming 4.5 years:
After factoring in the effect of potential buybacks, Microsoft’s expected CAGR returns went up from 1.2% to 4.5%. With Microsoft’s dividend yield of <1%, I can’t justify buying Microsoft even as a DGI play because the expected return on Microsoft is simply too low.
Even after a significant drop in 2022, Microsoft continues to trade at a premium valuation. The spread between Microsoft’s FCF yield and the 2-yr Treasury has narrowed to just 0.06%, which means the market is effectively pricing Microsoft as risk-free security. While I understand that a high-quality business like Microsoft deserves a premium valuation, I can’t digest the fact that it is being valued as a risk-free asset. Microsoft’s business is not immune to recession (and economic slowdowns), period.
To determine Microsoft’s fair value, I lowered my discount rate to 10% (factoring in the higher quality of business and treating Microsoft as a DGI play), and still I find it overvalued at current levels. From here, Microsoft’s expected CAGR return until 2027 is ~4.5% (including buybacks) and ~1.2% (without buybacks). Since my base case scenario is built with annualized revenue growth of 10% and steady margin expansion, I wouldn’t say this valuation is conservative. Hence, I do not like Microsoft at $255 as a GARP or as a DGI play. Mr. Market continues to view Microsoft as a safe-haven investment; however, a mean reversion alone could lead to another 25-30% loss in the stock. Also, if we do see a deep earnings recession, Microsoft may have even more downside. Considering the downside risk and little upside potential from current levels, I rate Microsoft neutral at current levels.
Key Takeaway: I rate Microsoft neutral at current levels due to unfavorable risk/reward.
Housekeeping Note: I'll soon be launching a Marketplace service on Seeking Alpha focused on generating long-term outperformance through financial engineering. For a short period of time post-launch, "The Quantamental Investor" will be offered at a heavily discounted legacy price. Stay tuned for more updates!
Microsoft has introduced new features for Teams users, including new Polls app to conduct quick surveys and updates to Teams on the iPad.
The Polls app will make it easier for users to find and add polls to chats and meetings. The poll user interface will also allow users to move the list of proposed surveys from the bottom to the side of the pane.
It will provide access to the polls portal page, where users can view or hide them in the side pane. From now on, The Polls app will show a view of the poll results instead of just displaying the vote as before, allowing the poll creator to see what the poll looks like to the public after it is set live.
Previously, poll creators had to create a new survey every time, but with the new update, the feature will provide a list of recently created polls to facilitate re-use.
Microsoft added a “Rating” as a new poll question that allows users to answer on a five-star scale and see a total number of ratings for a particular question.
With Microsoft’s July update, the company also built on the introduction of a collapsible right panel for Teams on the iPad for meetings, allowing teams on the iPad to automatically adjust to size, app orientation, and display modes.
The sources for this piece include an article in ZDNet.
Robert Whitaker - anatomist, University of Cambridge
David Archer - schools liaison officer, British Society for Cell Biology
David Lyden - David Lyden, cancer researcher and paediatric oncologist, Weill Cornell Medicine, Cornell University
Apple’s release of the new MacBook Air was highly anticipated, mostly for two reasons: its highly anticipated redesign and the introduction of the M2 processor, the next generation of Apple’s M-series of chips. As expected, the reviews for the M2 MacBook Air have been favorable, with Macworld’s Jason Cross calling it “a success” and “delightful everyday computer for most users.”
But the praise for the MacBook Air has been overshadowed by reports of throttled performance. Article after article warns of a performance “shortcoming,” “severe” throttling, and how it “can’t handle the heat,” and video after video demonstrates what’s supposedly wrong with the new laptop. It might lead some people to question whether it’s worth their money and wonder what Apple was thinking.
Here’s the thing: we’ve been here before, people. Back in 2020 when the new M1 MacBook Air was introduced, it made splashy headlines with its jaw-dropping speed improvement over the Intel chips as well as the throttling it needed to maintain a proper temperature under more strenuous workloads. In fact, heat has always been an issue with the MacBook Air even before Apple silicon.
It’s the same story, different year. Why is it news all over again? Why didn’t Apple fix the problem? The answer is simple and lies in what the MacBook Air’s intended user.
The MacBook Air doesn’t have any fans built into it. It’s a passively-cooled machine, meaning that it doesn’t use any special hardware to actively cool it. This is done purposefully by design so that the MacBook Air can be thinner than the MacBook Pro. If the MacBook Air starts to heat up, it will throttle performance to maintain a proper running temperature. This is another aspect of the MacBook Air that is by design.
The MacBook Air is also Apple’s most popular laptop because it’s the company’s most affordable one. Its price attracts what we’ll call “casual” users, those who spend most of their time on the web, use productivity apps like iWork or Microsoft Office, stream audio and video either for entertainment or for online meetings, and other productivity tasks that everyone does with a computer. The most stressful work likely involves apps like Photos, iMovie, GarageBand, or some other consumer-level creative software for short stints.
The MacBook Air handles these task without any problems–it’s as fast as the 13-inch MacBook Pro with the same M2 processor. It’s the one most people should buy—add the Air’s redesign and feature set, and we think it’s a better value than the 13-inch Pro. If I’ve just described what you do on a daily basis, the MacBook Air is a better value for you. (There is a separate performance issue with the MacBook Air or 13-inch MacBook Pro with a 256GB SSD that is a head-scratching design decision, but it’s not related to the throttling concerns.)
That’s not to say the MacBook Air doesn’t throttle. It does. But what makes it throttle? Tasks that “casual” users don’t regularly do. For example, one report of the Air’s severe throttling involved an export of 8K Canon RAW video. You know what produces 8K Canon RAW video? Cameras that are priced over $4,000. You know who works in 8K Canon RAW video? Video professionals. You know what Macs they buy? MacBook Pros.
The MacBook Air throttles when doing CPU-intensive tasks that are often done by users doing “serious” work, often in a professional setting. This is by design. If you’re using a MacBook Air and you are often rendering 8K RAW video, or producing lengthy high-resolution videos in Final Cut Pro, or professionally making music, or doing whatever it is that you do that taxes the CPU all the time and you get frustrated by it, you know what? You’re using the wrong tool for the job. You should be using a MacBook Pro.
If you insist that Apple fix the MacBook Air instead, ask yourself, if you’re willing to spend on equipment to produce the content you want, why are you skimping on the MacBook to do the finish the job?
A lot of these reports that use screaming headlines about the issue do actually point out that you have to be doing something atypical of a casual user to get the MacBook Air to throttle. But there are also a lot of reports that gloss over the fact that you’re probably not going to render a 60-minute 4K video in Final Cut Pro while you have 20 tabs open in Safari and you’re sorting your FileMaker Pro collection database of 10,000 gemstones. And when they gloss over this, it makes it seem like it’s an issue that affects everyone.
As someone who works in media, I admit, we’re in a battle for your attention, and some outlets are more willing to exaggerate in their headlines than others. (And yes, Macworld is guilty of this too. I hear about it in your emails and tweets.) But most outlets do clarify in its content who the intended user is for the MacBook Air.
The fanless MacBook Air is by design–Apple isn’t overlooking anything. Its target user is “the rest of us,” everyday users with productivity tasks to get done. The MacBook Pro is for users who are demanding of processing power. Get the right Mac for what you want to do.
MSRP: $1,999 (8-Core CPU, 14-Core GPU, 16GB RAM, 512GB SSD); $2,499 (10-Core CPU, 16-Core GPU, 16GB RAM, 1TB SSD)