Microsoft at the Helm of Tech Innovation

Unlock the future of tech and investment strategies with us, Steve Davenport and my co-host Clem Miller, as we dissect Microsoft's bold strides in the realms of generative AI, cloud computing, and the electrifying gaming industry. We lift the veil on the tech titan's alliance with OpenAI, dissecting how tools like Co-Pilot could transform everyday software suites. Delve into the complexities of AI regulation and its ripple effects across giants of the industry, courtesy of the EU's Digital Services Act. With Microsoft at the forefront, we examine the Intelligent Cloud, Azure's influence on corporate decisions, and even speculate on the enigmatic horizons of quantum computing. Stay on top of the industry's pulse as we navigate Microsoft's financial vitality and market valuation, focusing on its strategic conquests, like the acquisition of Activision Blizzard, which promises to redefine gaming within their ecosystem.

Whether you're a well-versed investor or simply intrigued by the confluence of technology and finance, this dialogue promises a deeper comprehension of the ebb and flow shaping today's tech landscape. Make sure to join our community by hitting like, subscribing, and sharing our episode with those looking to navigate the areas of tech investments with confidence.

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Transcript

Steve Davenport: 0:26

Welcome to Skip the Sky to Investor, and I'm Steve Davenport, and in this podcast, Clem Miller and I will be talking about Microsoft MSFT, another one of the magnificent seven. I think nearly everybody is familiar with Microsoft Windows operating system and the Windows Office Suite with Word, Excel, Powerpoint, etc. Our audience is also probably familiar with Microsoft Teams, LinkedIn and Bing. Clem, I understand that Microsoft has become a leader in generative AI, cloud computing and gaming. Let's start with generative. Can you tell us more about what Microsoft is doing there?

Clem Miler: 1:03

Sure, Steve. What happened was Microsoft invested in open AI. That's the creator Chat pt and GPT-4 and other iterations. What it's doing is it's incorporating generative AI into its product suite. One of the ways it's doing that is it's come up with Co-Pilot. Co-pilot is a product that enterprises can buy as well as individuals. For individuals, it's an add-on to various existing product lines.

Steve Davenport: 1:38

I can see how Co-Pilot can augment Microsoft's existing products. Do you think there's some risk that Microsoft will face unfavorable AI regulatory environment?

Clem Miler: 1:48

Yes, steve, it's a little too early to tell. I would say that probably these rules will emanate from the EU first, given that they have a new act called the Digital Services Act. Also, I think that it's important to realize that Microsoft won't be the only firm targeted. There'll be other firms in the AI space that'll be targeted Also. I would add to that that I think generative AI, while it might be targeted, is probably not the AI that policymakers might be the most worried about. They might be more worried about some of the more science-fictiony applications of AI.

Steve Davenport: 2:35

I also understand that Microsoft has a substantial cloud computing business and is incorporating AI into that. Can you tell us something about that?

Clem Miler: 2:45

Microsoft has always been a big player in cloud computing. It's been incorporating AI into its cloud and now calls its cloud services Intelligent Cloud. Its main product under Intelligent Cloud is the Azure platform, and Azure is for enterprise businesses. Basically, they're trying to make Azure Intelligent Decision Making support for enterprise clients.

Steve Davenport: 3:17

Wow. So besides generative AI, are there other technologies that Microsoft might someday incorporated in its cloud business?

Clem Miler: 3:25

Yeah, there's this concept called quantum computing, which is a very, very new concept. I know a few things about it, but a lot of it is beyond me technologically. I do know that they're taking this quantum computing and they have some beta testing that's out there with various scientific research groups who understand quantum computing a lot better than the rest of us do.

Steve Davenport: 3:58

I'm not sure I fully comprehend quantum cloud, but it certainly sounds cool. More down-to-earth, I understand Microsoft recently acquired gaming company Activision Blizzard, thereby expanding its involvement in online gaming. Clem what are the names of Microsoft's suites of?

Clem Miler: 4:16

games. When you put them together. You've got Call of Duty, you've got Soldier of Fortune, you've got Overwatch, you've got World of Warcraft and you've got Xbox Spider-Man. They're going to have a very large income stream coming in from all of these different products.

Steve Davenport: 4:40

I suspect that Microsoft checks off a lot of your stock selection boxes, Clem. Let's start off with profitability. How are they?

Clem Miler: 4:48

Doing Okay. So latest data is that their net income margin, that is, their net profit, is 36 percent, so they make 36 cents on every dollar of revenues. Their free cash flow margin, which is how much actual free cash they generate on revenues, is 26 percent, so they generate a lot of cash that can be used for stock buybacks and also for dividends. Their return on equity is 39 percent, which is also really outstanding.

Steve Davenport: 5:34

What about revenue and earnings growth?

Clem Miler: 5:37

So if you look at three year annualized revenue growth is 14 percent, eps earnings per share is 18 percent and free cash flow growth is also about 17 percent.

Steve Davenport: 5:56

Well, these growth rates are solid, especially for a company that is already so large. However, I wonder if Microsoft might be some EU regulatory hurdles that will slow its revenue earnings growth. What do you?

Clem Miler: 6:08

Think so. I mentioned earlier the Digital Services Act that regulates content. There's also a parallel EU Act to that called the Digital Markets Act. What the Digital Markets Act does is it requires companies to take actions to try to reduce their monopolistic power. That would be particularly in the case of the EU, but also these EU regulations extend extra territorially, so Microsoft may have to take some of these same measures here. One of those measures is to actually provide some of its algorithms to smaller businesses. So that's something that all of the large, magnificent seven companies, or most of the magnificent seven companies, have to deal with, is it?

Steve Davenport: 7:01

Microsoft expensive. How does Microsoft compare to the peg ratios of the other magnificent seven companies?

Clem Miler: 7:08

Well, first of all, let me tell our audience what the PEG is. PEG is the forward PE ratio divided by earnings growth. So it's a way of being able to balance valuation and growth. So Microsoft's peg ratio forward peg ratio is 2.4 times. So that's cheaper than Apple, which is three times. It's cheaper than Tesla, which is 3.8 times. However, it's more expensive than Google, which is 1.3 times, Nvidia, which is 1.4 times, Amazon, which is 1.7 times, and Meta, which is 1.2 times. So basically, Microsoft is pretty expensive.

Steve Davenport: 7:58

Well, so it's not the cheapest of the Mag7 stocks, but it's certainly a great name. I know you look to see whether short sellers are interested in a particular stock. What can you tell us about short seller interest for MSOF?

Clem Miler: 8:12

So the short interest ratio for Microsoft is 0.67%. That is among the lowest short interest ratios that I've seen in all of my research. So you know short sellers are just not interested in betting against Microsoft. That's nice.

Steve Davenport: 8:34

People aren't going after you. I know you also look at Glassdoor employee satisfaction as an indicator of corporate quality. How does Microsoft fare in the Glassdoor?

Clem Miler: 8:45

Also, you know they're very good on the Glassdoor ratings. They have a 4.3 stars out of 5 stars, which falls comfortably within the category of very satisfied. So yeah, I mean its employees have a very high satisfaction rating.

Steve Davenport: 9:03

Okay, that sounds good. Let's turn to our mailbag. We have a question here. If you had to choose between Microsoft and Apple, which name would you choose? My view is and I'm not saying this just because I like your club I like Microsoft over Apple here, because I'm concerned about Apple's position in China. I'm concerned about Apple's they're making a product and products go out of style and things change, and so I think that Microsoft is such an integral part of what everyone does in business and personally with their computing that I feel like Microsoft might have the edge. What's your view?

Clem Miler: 9:48

Clem, you know I couldn't say it any better than the way you just expressed it. If you look at Apple's performance over the last six months eight months I think that bears it out. They haven't done very well, and so for that reason I was very underweight when we did our Apple podcast a few months ago, and now I've sold that remaining portion.

Steve Davenport: 10:18

Wow. Thanks for those insights today, Clem, and thanks to our listeners on today's podcast. If you like our content, please like our podcast and subscribe and share with any friends who you think need some of these insights to help their investments. Thanks and have a good day.