February 14, 2024 • 11 mins
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
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Steve Davenport (00:02):
Welcome to Skip the Sky to Investor, and I'm
Steve Davenport, and in thispodcast, Clem Miller and I will
be talking about Microsoft MSFT,another one of the magnificent
seven.
I think nearly everybody isfamiliar with Microsoft Windows
operating system and the WindowsOffice Suite with Word, Excel,
Powerpoint, etc.
Our audience is also probablyfamiliar with Microsoft Teams,
(00:25):
LinkedIn and Bing.
Clem, I understand thatMicrosoft has become a leader in
generative AI, cloud computingand gaming.
Let's start with generative.
Can you tell us more about whatMicrosoft is doing there?
Clem Miler (00:39):
Sure, Steve.
What happened was Microsoftinvested in open AI.
That's the creator Chat pt andGPT-4 and other iterations.
What it's doing is it'sincorporating generative AI into
its product suite.
One of the ways it's doing thatis it's come up with Co-Pilot.
(01:01):
Co-pilot is a product thatenterprises can buy as well as
individuals.
For individuals, it's an add-onto various existing product
lines.
Steve Davenport (01:13):
I can see how Co-Pilot can augment Microsoft's
existing products.
Do you think there's some riskthat Microsoft will face
unfavorable AI regulatoryenvironment?
Clem Miler (01:24):
Yes, steve, it's a little too early to tell.
I would say that probably theserules will emanate from the EU
first, given that they have anew act called the Digital
Services Act.
Also, I think that it'simportant to realize that
Microsoft won't be the only firmtargeted.
(01:45):
There'll be other firms in theAI space that'll be targeted
Also.
I would add to that that Ithink generative AI, while it
might be targeted, is probablynot the AI that policymakers
might be the most worried about.
They might be more worriedabout some of the more
(02:07):
science-fictiony applications ofAI.
Steve Davenport (02:11):
I also understand that Microsoft has a
substantial cloud computingbusiness and is incorporating AI
into that.
Can you tell us something aboutthat?
Clem Miler (02:21):
Microsoft has always been a big player in cloud
computing.
It's been incorporating AI intoits cloud and now calls its
cloud services Intelligent Cloud.
Its main product underIntelligent Cloud is the Azure
platform, and Azure is forenterprise businesses.
(02:44):
Basically, they're trying tomake Azure Intelligent Decision
Making support for enterpriseclients.
Steve Davenport (02:53):
Wow.
So besides generative AI, arethere other technologies that
Microsoft might somedayincorporated in its cloud
business?
Clem Miler (03:01):
Yeah, there's this concept called quantum computing
, which is a very, very newconcept.
I know a few things about it,but a lot of it is beyond me
technologically.
I do know that they're takingthis quantum computing and they
(03:23):
have some beta testing that'sout there with various
scientific research groups whounderstand quantum computing a
lot better than the rest of usdo.
Steve Davenport (03:34):
I'm not sure I fully comprehend quantum cloud,
but it certainly sounds cool.
More down-to-earth, Iunderstand Microsoft recently
acquired gaming companyActivision Blizzard, thereby
expanding its involvement inonline gaming.
Clem what are the names ofMicrosoft's suites of?
Clem Miler (03:52):
games.
When you put them together.
You've got Call of Duty, you'vegot Soldier of Fortune, you've
got Overwatch, you've got Worldof Warcraft and you've got Xbox
Spider-Man.
They're going to have a verylarge income stream coming in
from all of these differentproducts.
Steve Davenport (04:16):
I suspect that Microsoft checks off a lot of
your stock selection boxes, Clem.
Let's start off withprofitability.
How are they?
Clem Miler (04:24):
Doing Okay.
So latest data is that theirnet 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
(04:47):
cash they generate on revenues,is 26 percent, so they generate
a lot of cash that can be usedfor stock buybacks and also for
dividends.
Their return on equity is 39percent, which is also really
outstanding.
Steve Davenport (05:10):
What about revenue and earnings growth?
Clem Miler (05:13):
So if you look at three year annualized revenue
growth is 14 percent, epsearnings per share is 18 percent
and free cash flow growth isalso about 17 percent.
Steve Davenport (05:32):
Well, these growth rates are solid,
especially for a company that isalready so large.
However, I wonder if Microsoftmight be some EU regulatory
hurdles that will slow itsrevenue earnings growth.
What do you?
Clem Miler (05:43):
Think so.
I mentioned earlier the DigitalServices Act that regulates
content.
There's also a parallel EU Actto that called the Digital
Markets Act.
What the Digital Markets Actdoes is it requires companies to
take actions to try to reducetheir monopolistic power.
(06:07):
That would be particularly inthe case of the EU, but also
these EU regulations extendextra territorially, so
Microsoft may have to take someof these same measures here.
One of those measures is toactually provide some of its
algorithms to smaller businesses.
So that's something that all ofthe large, magnificent seven
(06:32):
companies, or most of themagnificent seven companies,
have to deal with, is it?
Steve Davenport (06:37):
Microsoft expensive.
How does Microsoft compare tothe peg ratios of the other
magnificent seven companies?
Clem Miler (06:44):
Well, first of all, let me tell our audience what
the PEG is.
PEG is the forward PE ratiodivided by earnings growth.
So it's a way of being able tobalance valuation and growth.
So Microsoft's peg ratioforward peg ratio is 2.4 times.
(07:07):
So that's cheaper than Apple,which is three times.
It's cheaper than Tesla, whichis 3.8 times.
However, it's more expensivethan 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.
(07:28):
So basically, Microsoft ispretty expensive.
Steve Davenport (07:34):
Well, so it's not the cheapest of the Mag7
stocks, but it's certainly agreat name.
I know you look to see whethershort sellers are interested in
a particular stock.
What can you tell us aboutshort seller interest for MSOF?
Clem Miler (07:48):
So the short interest ratio for Microsoft is
0.67%.
That is among the lowest shortinterest ratios that I've seen
in all of my research.
So you know short sellers arejust not interested in betting
against Microsoft.
That's nice.
Steve Davenport (08:10):
People aren't going after you.
I know you also look atGlassdoor employee satisfaction
as an indicator of corporatequality.
How does Microsoft fare in theGlassdoor?
Clem Miler (08:21):
Also, you know they're very good on the
Glassdoor ratings.
They have a 4.3 stars out of 5stars, which falls comfortably
within the category of verysatisfied.
So yeah, I mean its employeeshave a very high satisfaction
rating.
Steve Davenport (08:39):
Okay, that sounds good.
Let's turn to our mailbag.
We have a question here.
If you had to choose betweenMicrosoft and Apple, which name
would you choose?
My view is and I'm not sayingthis just because I like your
club I like Microsoft over Applehere, because I'm concerned
(09:01):
about Apple's position in China.
I'm concerned about Apple'sthey're making a product and
products go out of style andthings change, and so I think
that Microsoft is such anintegral part of what everyone
does in business and personallywith their computing that I feel
like Microsoft might have theedge.
(09:23):
What's your view?
Clem Miler (09:24):
Clem, you know I couldn't say it any better than
the way you just expressed it.
If you look at Apple'sperformance over the last six
months eight months I think thatbears it out.
They haven't done very well,and so for that reason I was
(09:45):
very underweight when we did ourApple podcast a few months ago,
and now I've sold thatremaining portion.
Steve Davenport (09:54):
Wow.
Thanks for those insights today, Clem, and thanks to our
listeners on today's podcast.
If you like our content, pleaselike our podcast and subscribe
and share with any friends whoyou think need some of these
insights to help theirinvestments.
Thanks and have a good day.
Welcome to Skip the Sky to Investor, and I'm
Steve Davenport, and in thispodcast, Clem Miller and I will
be talking about Microsoft MSFT,another one of the magnificent
seven.
I think nearly everybody isfamiliar with Microsoft Windows
operating system and the WindowsOffice Suite with Word, Excel,
Powerpoint, etc.
Our audience is also probablyfamiliar with Microsoft Teams,
(00:25):
LinkedIn and Bing.
Clem, I understand thatMicrosoft has become a leader in
generative AI, cloud computingand gaming.
Let's start with generative.
Can you tell us more about whatMicrosoft is doing there?
Clem Miler (00:39):
Sure, Steve.
What happened was Microsoftinvested in open AI.
That's the creator Chat pt andGPT-4 and other iterations.
What it's doing is it'sincorporating generative AI into
its product suite.
One of the ways it's doing thatis it's come up with Co-Pilot.
(01:01):
Co-pilot is a product thatenterprises can buy as well as
individuals.
For individuals, it's an add-onto various existing product
lines.
Steve Davenport (01:13):
I can see how Co-Pilot can augment Microsoft's
existing products.
Do you think there's some riskthat Microsoft will face
unfavorable AI regulatoryenvironment?
Clem Miler (01:24):
Yes, steve, it's a little too early to tell.
I would say that probably theserules will emanate from the EU
first, given that they have anew act called the Digital
Services Act.
Also, I think that it'simportant to realize that
Microsoft won't be the only firmtargeted.
(01:45):
There'll be other firms in theAI space that'll be targeted
Also.
I would add to that that Ithink generative AI, while it
might be targeted, is probablynot the AI that policymakers
might be the most worried about.
They might be more worriedabout some of the more
(02:07):
science-fictiony applications ofAI.
Steve Davenport (02:11):
I also understand that Microsoft has a
substantial cloud computingbusiness and is incorporating AI
into that.
Can you tell us something aboutthat?
Clem Miler (02:21):
Microsoft has always been a big player in cloud
computing.
It's been incorporating AI intoits cloud and now calls its
cloud services Intelligent Cloud.
Its main product underIntelligent Cloud is the Azure
platform, and Azure is forenterprise businesses.
(02:44):
Basically, they're trying tomake Azure Intelligent Decision
Making support for enterpriseclients.
Steve Davenport (02:53):
Wow.
So besides generative AI, arethere other technologies that
Microsoft might somedayincorporated in its cloud
business?
Clem Miler (03:01):
Yeah, there's this concept called quantum computing
, which is a very, very newconcept.
I know a few things about it,but a lot of it is beyond me
technologically.
I do know that they're takingthis quantum computing and they
(03:23):
have some beta testing that'sout there with various
scientific research groups whounderstand quantum computing a
lot better than the rest of usdo.
Steve Davenport (03:34):
I'm not sure I fully comprehend quantum cloud,
but it certainly sounds cool.
More down-to-earth, Iunderstand Microsoft recently
acquired gaming companyActivision Blizzard, thereby
expanding its involvement inonline gaming.
Clem what are the names ofMicrosoft's suites of?
Clem Miler (03:52):
games.
When you put them together.
You've got Call of Duty, you'vegot Soldier of Fortune, you've
got Overwatch, you've got Worldof Warcraft and you've got Xbox
Spider-Man.
They're going to have a verylarge income stream coming in
from all of these differentproducts.
Steve Davenport (04:16):
I suspect that Microsoft checks off a lot of
your stock selection boxes, Clem.
Let's start off withprofitability.
How are they?
Clem Miler (04:24):
Doing Okay.
So latest data is that theirnet 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
(04:47):
cash they generate on revenues,is 26 percent, so they generate
a lot of cash that can be usedfor stock buybacks and also for
dividends.
Their return on equity is 39percent, which is also really
outstanding.
Steve Davenport (05:10):
What about revenue and earnings growth?
Clem Miler (05:13):
So if you look at three year annualized revenue
growth is 14 percent, epsearnings per share is 18 percent
and free cash flow growth isalso about 17 percent.
Steve Davenport (05:32):
Well, these growth rates are solid,
especially for a company that isalready so large.
However, I wonder if Microsoftmight be some EU regulatory
hurdles that will slow itsrevenue earnings growth.
What do you?
Clem Miler (05:43):
Think so.
I mentioned earlier the DigitalServices Act that regulates
content.
There's also a parallel EU Actto that called the Digital
Markets Act.
What the Digital Markets Actdoes is it requires companies to
take actions to try to reducetheir monopolistic power.
(06:07):
That would be particularly inthe case of the EU, but also
these EU regulations extendextra territorially, so
Microsoft may have to take someof these same measures here.
One of those measures is toactually provide some of its
algorithms to smaller businesses.
So that's something that all ofthe large, magnificent seven
(06:32):
companies, or most of themagnificent seven companies,
have to deal with, is it?
Steve Davenport (06:37):
Microsoft expensive.
How does Microsoft compare tothe peg ratios of the other
magnificent seven companies?
Clem Miler (06:44):
Well, first of all, let me tell our audience what
the PEG is.
PEG is the forward PE ratiodivided by earnings growth.
So it's a way of being able tobalance valuation and growth.
So Microsoft's peg ratioforward peg ratio is 2.4 times.
(07:07):
So that's cheaper than Apple,which is three times.
It's cheaper than Tesla, whichis 3.8 times.
However, it's more expensivethan 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.
(07:28):
So basically, Microsoft ispretty expensive.
Steve Davenport (07:34):
Well, so it's not the cheapest of the Mag7
stocks, but it's certainly agreat name.
I know you look to see whethershort sellers are interested in
a particular stock.
What can you tell us aboutshort seller interest for MSOF?
Clem Miler (07:48):
So the short interest ratio for Microsoft is
0.67%.
That is among the lowest shortinterest ratios that I've seen
in all of my research.
So you know short sellers arejust not interested in betting
against Microsoft.
That's nice.
Steve Davenport (08:10):
People aren't going after you.
I know you also look atGlassdoor employee satisfaction
as an indicator of corporatequality.
How does Microsoft fare in theGlassdoor?
Clem Miler (08:21):
Also, you know they're very good on the
Glassdoor ratings.
They have a 4.3 stars out of 5stars, which falls comfortably
within the category of verysatisfied.
So yeah, I mean its employeeshave a very high satisfaction
rating.
Steve Davenport (08:39):
Okay, that sounds good.
Let's turn to our mailbag.
We have a question here.
If you had to choose betweenMicrosoft and Apple, which name
would you choose?
My view is and I'm not sayingthis just because I like your
club I like Microsoft over Applehere, because I'm concerned
(09:01):
about Apple's position in China.
I'm concerned about Apple'sthey're making a product and
products go out of style andthings change, and so I think
that Microsoft is such anintegral part of what everyone
does in business and personallywith their computing that I feel
like Microsoft might have theedge.
(09:23):
What's your view?
Clem Miler (09:24):
Clem, you know I couldn't say it any better than
the way you just expressed it.
If you look at Apple'sperformance over the last six
months eight months I think thatbears it out.
They haven't done very well,and so for that reason I was
(09:45):
very underweight when we did ourApple podcast a few months ago,
and now I've sold thatremaining portion.
Steve Davenport (09:54):
Wow.
Thanks for those insights today, Clem, and thanks to our
listeners on today's podcast.
If you like our content, pleaselike our podcast and subscribe
and share with any friends whoyou think need some of these
insights to help theirinvestments.
Thanks and have a good day.
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