The quarterly results presented by the company show that the software giant has three problems with complex solutions
The quarterly results presented by Microsoft show that the software giant has three problems. The downside is that Microsoft can do very little to control any of them.
The company’s revenue, valued at $1.9 trillion, grew 11% to $50 billion, but profit fell 14%. One of the ills it faces is the decline in consumer demand for computers. Worldwide PC shipments in the third quarter fell 15% from a year earlier to 74 million, according to research institute IDC. It was already a mature market before the pandemic, but sales have climbed to unsustainable levels in recent years for work and homeschool. Now the sharp pullback is affecting the company’s Windows and Office businesses. Since personal computers last between three and five years, this throwback has many quarters to go.
The strength of the dollar is another scourge. Microsoft received nearly half of its revenue from outside the US in the year ending June. A strong dollar means that either the company receives fewer dollars for each foreign sale, or it has to raise prices to compensate for that strength, possibly deterring buyers. Microsoft says revenue growth would have been 5 percentage points higher in the quarter at constant currency.
Microsoft does have a little more control over its cloud business. Amazon Web Services dominates the market, but Microsoft’s Azure service grew 35% last year. It is a business that has travel. Additionally, Azure offers an alternative to Amazon for companies competing with the $1.2 trillion behemoth. Still, a year ago Azure was growing at a rate of 50%, but today Microsoft is at the mercy of shrinking customer portfolios. Its shares are trading at 24 times estimated earnings for the next 12 months, according to Refinitiv, slightly above their 103-year average. Maybe they deserve a discount.
