Microsoft Shares: Eyestock spotlight

When Sam Altman, OpenAI Co-Founder and CEO answered the question of Pat Gelsinger, Intel CEO why should we be Tech optimists about AI, he replied that this is going to be one of the greatest tools humans have yet invented.

Well, let’s bring up the topic of AI again. We don’t know how it will change humanity in the future. Still, it is one of the key drivers of the current growth of the American stock market, allowing the S&P500 index to reach the level of 5000 points and again reach historic highs.

IoT Analytics published a material that provided a visual illustration of how the AI market is divided today. We have already written about NVIDIA, as well as about Microsoft, but we have a new reason to do it once again. If we turn to the same illustration, then in the section on models and platforms we will see 2 names: OpenAI and Microsoft. OpenAI, thanks to its launch of ChatGPT, has conquered most of the market, and Microsoft is in the second place while being the largest shareholder of the Californian startup.

One of the key segments of the company’s growth recently is the cloud service and the flagship product of the platform Azure. According to the quarterly report, Intelligent Cloud revenue is $25.88 bln (41.7% of total revenue). By Azure, Microsoft offers AI solutions that go beyond the public ChatGPT service. A significant difference between the IT giant’s offer is security and personalization since incoming and outgoing content is not used for further development of the neural network. Data protection is an important factor for Azure clients because they are large corporations that want to improve their position through new technologies rather than sharing secrets with competitors, aren`t they?

But Microsoft has come under scrutiny and pressure because of its close ties to OpenAI. Even Ilon Musk filed a lawsuit against OpenAI, CEO Sam Altman and President Greg Brockman, alleging that the startup has strayed from its mission of creating responsible AI and has become dependent on Microsoft, its largest investor. Against this background, the news that Microsoft has entered into an agreement with the European company Mistral AI looks very interesting, since the French company is considered a serious competitor to OpenAI. In fact, the American giant decided to add another AI model for Azure clients that should provide even more opportunities to the clients. According to the developer, Mistral model is open-source, it has great abilities in the field of speech recognition as well as it is a large language model. Microsoft declined to disclose the terms of the agreement or the amount of the investment. Let us recall that they invested $13 billion in OpenAI at one time.

By the way, against the backdrop of aggressive investments in AI, many of us have already forgotten about the record purchase of Activision Blizzard for $68.7 billion. Probably, any other company would already begin to feel pressure from financial obligations after such accrued expenses. But not Microsoft. It is still financially solvent, with $81 billion in cash in its accounts as of December 31, 2023.

Less than a month ago, we conducted a detailed review of the company and concluded that it is profitable, liquid and solvent. And also quite expensive if you follow Eyestock stock valuation model. In light of the active development of AI and the company`s equally active participation in this trend, we continue to consider MSFT shares to be an extremely interesting strategic investment for the years. In the end, whoever is at the beginning should get more at the end, but for now, Microsoft is far ahead of Google, Accenture, Cognizant and others.

But we urge you to pay attention to the record valuation of the company in this regard. Since not only we but also the whole investment community and the market see endless prospects for business development, the price of MSFT stocks is subject to inflation. The price has risen 88% from a low of $214 in November 2022 to March 6, when it closed at $402.65 per share. Apparently, the market not only expects the company to be able to maintain high rates of net income growth — 20% average over the last 20 quarters — but also to increase the pace.

MSFT stock is currently trading at a P/E ratio of 36, and this is the maximum if we take the history of the last five years. The last time something like this happened was back in 2018 when the company’s valuation was even higher than 40! And then the stock showed a decline from $115 to $95 by 17%. Oh, how ridiculous the prices were then! By the way, since then you could increase your capital 4 times in a little more than 5 years — not bad.

At the end of the article, we would like to leave you with these thoughts, but also point by point list the strengths and weaknesses of Microsoft Corp today, according to Eyestock vision.

Microsoft PROs:
-Financial performance is outstanding with a net profit margin is 36% while earnings quality is high
-Amy Hood, Microsoft CFO is waiting operating margin for the full year in fiscal 2024 will improve by one to two percentage points, despite higher investment in cloud and AI infrastructure.
-Financial position is confident with a 0.36 debt-to-equity ratio and annual cash flow covering the entire debt
-Return on invested capital is 35% almost 10 times more than the risk-free rate
-The average net income growth rate for 5 years is 20% while volatility is not much more — 21%
-Buyback: as of December 31, 2023, $15.9 billion remained of the $60 billion share repurchase program

Microsoft CONs:
The business has no weaknesses in our opinion, but all the risks of buying MSFT shares lie in the current record price and high valuation.
-P/E ratio 36 while the average is 31
-E/P (earnings yield is the inverse of the price-earnings ratio) is only 2.8% while 10-year Treasury is 4.15% as of March 5, 2024.
-P/S is 13.2 and this is almost an all-time record
-PEG is 1.1 assuming actual growth rate, not forecast

Take care of yourselves and your investments. Make informed investment decisions.