August 2024 – Page 3

Microsoft Fiscal Q4 2024 Earnings: Capex Surges QoQ; Azure Remains Durable

Posted on August 1, 2024June 30, 2026 by io-fund

The reason that AI semiconductors were deep in the green is because Microsoft announced strong QoQ increase to its capex for AI infrastructure. Microsoft’s capex increased 36% sequentially and 78% YoY to $19 billion in Q4. Capex was $14 billion last quarter, where it grew 22% sequentially.

Full year 2024 capex was up 75% YoY to $55.7 billion, yet this quarter’s run rate suggests we could see up to $80 billion in capex in FY2025. Notably, management is guiding for a further YoY increase in capex in FY’25. We’ve covered the importance of Big Tech’s capex for our AI stocks in an analysis here.an analysis here.

With Azure AI forming a larger percentage of Azure’s growth and Azure customers growing 60% YoY, there seems to be no slowdown in sight for capex growth, a positive for the AI data center stocks in our portfolio which saw strong rallies following the report.

Copilot is also showing very strong growth, with Copilot accounting for over 40% of GitHub’s revenue growth this year and is already a larger business than all of GitHub when Microsoft acquired it, with Microsoft being optimistic about seeing similar adoption trends in Copilot for Microsoft 365.

This quarter, Microsoft beat on both the top and bottom lines with margins above guided levels. The stock was initially brought down by a headline miss as Azure growth of 29% and 30% YoY on a CC basis came in at the lower-end of its guidance range due to some softness in Europe during the last month of the quarter and continues to be impacted by capacity constraints.

However, while management guided for a slight deceleration in Azure growth in Q1’25, with growth of 28% to 29% in CC (vs 30% this quarter), they expect an acceleration in H2’25 as their capital investments increase AI capacity.

Microsoft Fiscal Q4 Financials:

Revenue and EPS:

Fiscal Q4 revenue grew by 15% and 16% in CC YoY to $64.7 billion. It beat expectations by $260 million, driven by a 19% increase in Intelligent Cloud revenue and the Activision acquisition that contributed 3% to revenue growth. Azure growth was 29% (30% in constant currency), which came in at the lower end of their guidance range but was consistent with Q3 when adjusting for the leap year. Azure growth included 8 points from AI services, up from 7 points last quarter, and demand continues to remain higher than available capacity.

The company guided for Azure growth of 28% to 29% percent in constant currency next quarter. Management expects Q4 consumption trends to persist through the first half of FY’25 with an acceleration in the second half as AI capacity increases.

For next quarter, management guided to $64.3 billion at the midpoint, which is below analyst estimates of $65.30 billion
GAAP EPS of $2.95 beat estimates by $0.02, representing YoY growth of 10%. Non-GAAP EPS of $2.95 beat estimates by $0.01.

Segment Revenue:

Productivity and Business revenue was $20.3 billion, up 11% YoY, driven by 13% growth in Office 365 Commercial. Growth came in 140 bps ahead of the midpoint of the guided range.
Intelligent Cloud revenue was $28.5B, up 19% YoY, driven by Azure and other cloud services revenue growth of 29%. Growth came in in-line with the midpoint of the guided range.
More Personal Computing revenue was $15.9 billion, up 14% YoY. Windows revenue increased 7% with OEM revenue growth of 4% and Commercial products and cloud services revenue growth of 11%, while devices revenue decreased (11%). Xbox content and services revenue increased 61% YoY driven by 58% of net impact from the Activision acquisition. Growth came in 320 bps ahead of the midpoint of the guided range.

Guidance on Segment Revenue:

Productivity and Business revenue guided to $20.45 billion at midpoint for growth of 9.2% to 10.8% YoY. This would be a QoQ deceleration of 100 bps in growth rate, at the midpoint.
Intelligent Cloud revenue was guided to $28.75 billion at midpoint for growth of 17.9% to 19.1% YoY. This is a deceleration of 50 bps in growth rate, at the midpoint.
More Personal Computing revenue was guided to $15.1 billion at midpoint for growth of 9% to 12% YoY. This is a deceleration of 350 bps in growth rate, at the midpoint.

Margins:

Margins topped management’s guide in gross margin, operating margin and net margin but fell across the board YoY. However, excluding the impact of an accounting estimate for useful lives, gross and operating margins would have been slightly up YoY. Operating margin for Q4 was 43.1%, 80 bps above guidance, and a 10 bps decrease YoY, helped by operating leverage and offset by the Activision acquisition.

Microsoft’s More Personal Computing segment experienced the largest QoQ operating margin decline, down 639 bp QoQ to 30.9% due to impact from the Activision acquisition.

Full year operating margins were up 287 bps, ahead of management’s guidance for 100 to 200 bps. However, management continues to expect operating margins to be down 1% in FY2025 due to increased expenses related to cloud and AI.

Gross margin of 69.6% was down from 70.1% in the year ago quarter. The guide for next quarter is 68.8%.
Operating margin was 43.1%, down from 43.2% in the year-ago quarter. Operating margin is guided for 45.1% next quarter.
Net margin was 34%, down from 35.74% in the year-ago quarter. Net margin is guided to improve to 35.7% next quarter.
Productivity and Business operating margin was 49.9%, down 191 bp QoQ but expanding 42 bp YoY.
Intelligent Cloud operating margin was 45.09%, down 175 bp QoQ but expanding 120 bp YoY
More Personal Computing operating margin was 30.9%, down 639 bp QoQ due to impact from the Activision acquisition

Cash and Debt:

Operating cash flow was $37.19 billion, up 29% YoY driven by strong cloud billings and collections.

Free cash flow was $23.3 billion, up 18% YoY reflecting higher capital expenditures to support cloud and AI offerings.

Microsoft returned $9.78 billion to shareholders in the form of dividends and share repurchases.

For Q4 2024, the company has $51.63 billion total debt, with $75.54 billion in cash and short-term investments compared to $65.44 billion in total debt and $80.02 billion in cash and short-term investments in the previous quarter. The company repaid $13.1 billion of debt in the recent quarter.

Key Metrics:

Bookings increased 17% YoY and 19% on a constant currency basis. This was significantly above expectations and driven by growth in the number of $10M+ and $100M+ contracts for Azure and Microsoft 365. This compares to 29% growth (31% on CC basis) in Bookings last quarter and compares to a -2% decrease (-1% on CC basis) in Bookings in the year ago quarter.

Commercial RPO grew by 20% YoY to $269 billion. This compares to 20% growth last quarter and 19% YoY growth in the year ago quarter.

Azure AI customers totaled more than 60,000, implying customer growth rate of nearly 60% YoY and up over 13% vs Q2’24 with average customer spend continuing to grow. The number of Azure AI customers using data and analytics tools also grew nearly 50% YoY.

The next-gen analytics platform, Microsoft Fabric, has over 14,000 paid customers, up 20% QoQ.

Azure Arc, a tool that allows organizations to manage resources not hosted on Azure, has 36,000 customers, up 90% YoY and 9% QoQ.

GitHub now has an annual revenue run rate of $2B with GitHub Copilot accounting for over 40% of GitHub’s revenue growth this year and is already a larger business by itself than all of GitHub at acquisition. GitHub Copilot has been adopted by over 77,000 companies, up 180% YoY.

Power Platform, a collection of low-code development tools, saw MAUs rise 40% YoY to 48 million. 480,000 organizations have also used the AI-powered capabilities in Power Platform, up 45% QoQ.

In its second full quarter of availability, Copilot for Microsoft 365 continues to gain traction as the number of people using Copilot daily at work nearly doubled QoQ. Copilot customers increased 60% QoQ and the number of customers with over 10,000 seats more than doubled QoQ. Copilot Studio, a low-code tool for creating and maintaining copilots, saw a 70% QoQ increase in organizations using it to 50,000.

Earnings Call:

Azure AI Growth as a Leading Indicator of Capex Investment:

Microsoft stated capex was $19 billion this quarter compared to $7.8 billion in the year ago quarter, up 77.6% YoY. This compares to $14 billion in the previous quarter, up 35.7% sequentially. For FY’24, capex was $55.7B, up 74.6% YoY. Furthermore, Microsoft is guiding for a YoY increase in capex in FY’25.

Given this significant spending, analysts are questioning whether monetization is going to match the level of investment.

Question:

Keith Weiss (Analyst)

“Is CapEx still an appropriate leading indicator for cloud growth? Or does the shift in gross margin profile change that equation? Or said another way, maybe can you give us a little bit more help in understanding the timing between the CapEx investments and the yield on those investments?”

Answer:

Satya and Amy (Management)

Satya noted “So I would say – and obviously, the Azure AI growth, that's the first place we look at. That then drives bulk of the CapEx spend, basically, that's the demand signal because you got to remember, even in the capital spend, there is land and there is data center build, but 60-plus percent is the kit, that only will be bought for inferencing and everything else if there is demand signal, right?”the Azure AI growth, that's the first place we look at. That then drives bulk of the CapEx spend, basically, that's the demand signal because you got to remember, even in the capital spend, there is land and there is data center build, but 60-plus percent is the kit, that only will be bought for inferencing and everything else if there is demand signal, right?”

Amy further noted “[…] roughly half of FY2024's total capital expense as well as half of Q4's expense, it's really on land and build and finance leases, and those things really will be monetized over 15 years and beyond… they're incredibly flexible because we've built a consistent architecture”.half of FY2024's total capital expense as well as half of Q4's expense, it's really on land and build and finance leases, and those things really will be monetized over 15 years and beyond… they're incredibly flexible because we've built a consistent architecture”.

Given the flexibility of the underlying infrastructure that comprises half of current capex spend, Microsoft feels comfortable investing in land and data centers ahead of demand though only outfits them with infrastructure kits based on observed customer demand with the KPI being Azure AI growth.

In a further answer, management noted that they can adjust capex investment with little impact on revenue growth.

Amy noted “the pace at which we fill those builds with CPUs or GPUs will be demand-driven. And so if we see differences in demand signal, we can throttle that investment on the CPU side,…the same thing on the GPU side. And so you're right that you could see relatively consistent revenue patterns and yet see these inconsistencies and capital spend quarter-to-quarter.”if we see differences in demand signal, we can throttle that investment on the CPU side,…the same thing on the GPU side. And so you're right that you could see relatively consistent revenue patterns and yet see these inconsistencies and capital spend quarter-to-quarter.”

Factors Driving Soft Q4 Azure Growth Expected to Persist

Analysts noted that Azure growth of 30% YoY came in at the lower end of their provided range of 30% to 31%, which was driven by persistent capacity constraints and modest softness in Europe. They asked management to elaborate on that and how they factored that into Q1’25 guidance.

Answer:

Amy (Management)

“The distinguishing between being at the higher end or at the lower end, really was some softness we saw in a few European geos on non-AI consumption really made the difference in that number. And we've assumed that going forward into H1 inclusive of my guide 28% to 29% going forward. And then let me separate which was your larger point, which is what are the other factors you see ongoing. Number one, you're right, capacity constraints, particularly on AI and Azure will remain in Q4 and will remain in H1.”

Broader Applications of Copilot

With GitHub Copilot already accounting for 40% of GitHub’s revenue growth this year and pushing it to an annual revenue run rate of $2 billion, analysts are questioning if there is potential for it to drive similar growth for non-developers too.

Question:

Mark Murphy (Analyst)

“With a couple of quarters of Copilot for M365 availability under your belt now, how are you assessing the capability of Copilots to replicate the productivity gains that they've created for developers, which seem to be very high and to do something similar for the broader population of knowledge workers?”

Answer:

Satya (Management)

“So we think of this as really a new design system for knowledge and frontline work to drive productivity, which would be very akin to what has happened in software engineering. So when you think about marketing or finance or sales or customer service, we will effectively replicate what you just said, which is the type of productivity we've seen in developers, will come to all of these functions as they think about their work, workflow and workout effect, all being driven by Copilots.”

Management noted that they aim to extend the productivity benefits seen with GitHub Copilot to a broader population of knowledge workers through M365 Copilot.

Valuation

Microsoft could see about 10% to 15% upside from here, at which time, it will be trading at a forward PE where the stock has met resistance two times prior.

The same is true on the sales valuation where the stock is trading at a forward PS of 11 to where a PS of 12 or 13 mark its absolute maximum valuation. There’s some room left but not a lot to work with.

Conclusion

Microsoft’s report shows continued growth in all the right areas and supports our large allocation to AI data center stocks. Ultimately, we closed Microsoft following our July quarterly webinar where we expressed valuation concerns. Pausing Microsoft in our I/O Fund portfolio is likely to be short-lived as we see the company as a clear winner in AI, with AI driving an increasing amount of Azure’s growth and with Azure continuing to be capacity constrained. We’ve also been quite vocal that enterprise is where the growth in AI will come from, and Microsoft is unique among the FAANGs for its leading position with enterprise customers. We continue to see Microsoft as a quality company, yet we are rolling the dice to see if we can get a lower entry.

Richard Chu, Equity Analyst at I/O Fund, contributed to this analysis

Pro premium members receive deep-dive research on all the stocks in the portfolio and participate in the quarterly earnings kickoff webinar. In addition, the Advanced Market Signals Members receive regular technical and broad market analysis, weekly webinars from our Portfolio Manager, Knox Ridley, hedge signal, and trade alerts. We booked a total 275% gain on Super Micro in early May across all entries and exits. Learn more here.We booked a total 275% gain on Super Micro in early May across all entries and exits. Learn more here.

Recommended Reading:

Bitcoin Update: Next Stop $100,000

Posted on August 1, 2024June 30, 2026 by io-fund

Bitcoin is the best performing asset in market history. There is no stock or asset that has come close to delivering the returns of this digital currency — it has greatly outperformed all FAANGs, and all outliers in the history of the markets. Yet, Bitcoin is also unusual in that its volatility is equally as historic, capable of regular +70% drawdowns that inevitably push to new highs within an average of 2.5 years.

The sane approach to the immense, yet volatile, opportunity that Bitcoin provides is to use risk management. Understanding what Bitcoin is and why governments have been unable to squash the currency is also instrumental to being a successful Bitcoin investor. Since 2019, our firm has helped our readers understand this unique protocol and why it’s worthy of rivaling the world’s most valuable stocks.

However, with that said, it’s technical and on-chain analysis that keeps you in the game with Bitcoin. Our goal with Bitcoin and other life-changing tech stocks is to participate in the outsized returns, while side-stepping painful periods of volatility.

For example, in early 2021, we cut our position in half when Bitcoin was trading between $50,000 – $64,000. This was after accumulating between $7,000 – $20,000. We then started accumulating again in December of 2022, when we went on record stating that Bitcoin was a buy in the $16,000 region.

“Though we are in the 4th bear cycle in Bitcoin's history, the prior 3 cycles suggest where we are is a rare buying opportunity. There is ample evidence to support the $15,500 level is either a major low or very close to a major low. Both the technical and on-chain analysis support this.”

Bitcoin does not have classic fundamental analysis to guide investors, therefore, technical analysis and a new field of on-chain analysis has been a rewarding approach to managing Bitcoin’s risk.

In our last report, we stated that we are raising our overhead targets to $106,000 – $190,000. The technical and on-chain analysis supported this stance, and still does. While bitcoin tested the upper region of our support zone, we believe that the low is likely in. We are setting up for the next leg higher, and setting up our final purchase within the current Bitcoin bull cycle.

The Truth About Bitcoin’s Upside and Downside

The below chart shows four of the best investments in US market history. from their IPOs, Apple is up +143,000%, Berkshire Hathaway is up +215,000%, Nvidia is up +285,000%, Microsoft is up +445,000%.

Source: I/O Fund

Here is the same chart, measured in percentage increase, when we add Bitcoin in with the four of the best stocks in history.

Source: I/O Fund

These stocks don’t even register in comparison to Bitcoin’s returns since it began mysteriously trading in October of 2009. Since this release, it is up an incredible +8 billion percent (not a typo). However, many have argued that it did not really start gaining public recognition until one year later, and that should be the true starting point for measuring it’s returns. So, to be fair, from October of 2010, it is still up a staggering 665,000,000%.

This is not a feature of the past. Since its recent low in 2022, Bitcoin is up 336%, outpacing all but one of the Mag 7 including AI stocks such as, Broadcom (AVGO).

Source: I/O Fund

What makes this valuable to a portfolio is not only the alpha it has generated, but the fact that it has such a low correlation to tech stocks. The below chart measures the correlation coefficient between Bitcoin and the Mag 7 + Broadcom. Anything between +50 and +100 means the two are highly correlated, between +50 and -50 means no correlation, and between -50 and -100 means inversely correlated.

Source: I/O Fund

While delivering superior returns than all of the great large-cap tech stocks in this bull cycle, minus Nvidia, it did so while having a low inverse correlation to tech. As of right now, while tech is seeing outsized volatility due to a much needed rotation in the equity markets, Bitcoin has an inverse relationship to these stocks, moving higher against the volatility. As a portfolio manager who seeks unique diversification in the form of a growth asset, this is very valuable. It’s easy to miss this key quality to Bitcoin’s price action without looking closely at the data.

Unusual Volatility

Another intriguing point about Bitcoin’s performance can be found in analyzing its volatility. Most investors are well aware it’s highly volatile, and thus stay away. Since inception, it has seen four drawdowns of 70% or greater. These are drops that most assets rarely recover from, and if they do, it takes years to decades before reclaiming those highs.

However, every time bitcoin has seen one of these large drawdowns, it has fully recovered within 2.5 years, on average. This is rare, and I don’t know any other asset that has done this multiple times.

Source: I/O Fund

Regardless of your feelings toward this polarizing asset, it’s worth asking why it is up so much, and why it quickly recovers unlike any asset the market has ever seen? If it truly were a bubble, then why doesn’t the bubble pop? Instead, the asset comes back stronger than ever and reclaims all-time highs. Bitcoin is here to stay, and it is worth understanding why this is.

Revolutionary Tech That Solves a Problem

Bitcoin was designed to disrupt the oldest and most powerful system in the global economy – centralized banking. It is a global asset that offers an exit from the centralized fiat system. This is a concept that is new to everyone, as all money is understood in relation to personal banks, and centralized banking.

During the great financial crisis, Satoshi Nakamoto released a white paper on Bitcoin, introducing it to the world. In that paper, the intended purpose of Bitcoin was stated:

“The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve.”

Bitcoin is a value exchange that needs no intermediary. It sidesteps counterparty risk that is inherent to banking and cannot be inflated through politics and questionable centralized policies. It was designed to be a hedge against another banking crisis, and potential inflation crisis.

Over the last decade, we have been forced into the greatest monetary experiment in recorded history. Central banks held interest rates at zero for nearly a decade, while some held them with a negative rate. In all of recorded history, there has never been an instance where a debtor was charging interest to give them a loan. Yet, this is what we saw in many industrialized nations for many years.

No one knows how this experiment will end, as there is no precedent for it in history. As a result, investors continue to see unsettling stats, like: Global Debt/GDP at 90.8%, U.S. Debt/GDP is 127%, Japan Debt/GDP 268%, $517B in unrealized losses on bank balance sheets while FDIC now has 63 banks on problem list in 2024.

Maybe this gets resolved without any concern. But if it doesn’t, we may actually get a chance to see if Bitcoin’s stated purpose can offer an alternative to what the unwinding of this excess may do to a currency.

Our firm understood this, and regularly published on the bigger picture for our readers since 2019. We publicly established a position in Bitcoin at $7,717 within a month of launching our site following a free article we wrote in 2019 where we predicted Bitcoin will exceed the markets cap of the world’s most valuable companies.

“My prediction is that once the Lightning Network is built out, bitcoin will surpass the market cap of Apple, Google, Microsoft and Amazon to reach a minimum of $50,000 per token. This is because the protocol solves critical needs for global populations, including the reduction of financial fees for 7 billion people, and offers a need to store money during times of inflation…Technically speaking, bitcoin is also the world’s most secure financial network. The transfers eliminate 3% in processing fees and hedges against inflation. This can, and should be, worth as much as a search engine, enterprise software, a social media network, warehouse fulfillment (AMZN) or iPhone hardware.

The problem that bitcoin solves is underestimated (or worse, not understood). Bitcoin offers global populations a digital alternative to centralized fiat currency. The masses have been quite clear, whether from El Salvador, Venezuela, Japan or Africa, — the 7 billion+ people in this world seek a way to sidestep risks that global citizens face by handing over their assets to centralized banks and governments. These people seek a true and secure way out of the centralized banking world, and those who do not embrace this will be left behind by holding only centralized currency without diversification.

Sign up for I/O Fund's free newsletter with gains of up to 2600% because of Nvidia's epic run – Click hereClick hereClick here

Technical Analysis

Bitcoin has no management team, no earnings reports, and no fundamentals to base an investment decision. The large swings in both directions are seemingly at random. Through technical analysis, we can determine these swings are not random, and instead, get a reasonable means to both establish risk controls and determine buy and sell targets.

From an aerial view, it’s important to identify the direction of the trend. The easiest way to do this is to look for the vertical moves and the overlapping/messy corrections. In other words, which way are the vertical moves – up or down? This is your dominant trend.

Source: I/O Fund

In 2022, the vertical moves were down, which were interrupted by short and shallow bounces that were overlapping and messy. These were corrections within the dominant trend, and that trend changed in late 2022. Note how the vertical moves since then have been up, while the overlapping corrections have been down. Today, we are in another overlapping and messy retrace of the vertical moves higher. This means that we are likely in a correction within a larger uptrend.

The Elliott Wave count we have been following since before the 2022 low, which can be found in prior December 2022 Report, adds more context to the upward trend we are currently in.

Source: I/O Fund

We are in a large 5 wave pattern, which is targeting well above $100,000. It is an incomplete pattern, and needs 2 more large swings higher to complete the full 5 waves. Like with all 5 wave patterns, we have bought on each dip, and continue to buy as long as we stay above critical support, which is now at $42,750. Above this support zone, and the odds favor higher levels.

Furthermore, all 5 wave patterns are fractal. In other words, a small 5 wave pattern turns into a larger one, and so on, until you hit your target. We see 5 wave patterns (vertical moves) in the direction of the dominant trend, and 3 wave patterns (overlapping corrections) as counter moves, or pauses, within the dominant trend.

If we analyze the current correction and bounce off the low, it appears that we are setting up for the next vertical move higher.

Source: I/O Fund

We have a full corrective pattern in place that ended around $54,000 in early July. From this low, look at what has developed. This is a clean, vertical, 5 wave bounce, which suggests we are in the early stages of the next rally.

The next pullback will be where we add our last tranche in this bull cycle. Since this cycle started, we have been systematically accumulating, while raising our critical supports along the way. Below is the history of Bitcoin buy alerts that we have issued to our subscribers in real-time since early 2023.

Source: I/O Fund

While we don’t expect to always buy the bottom and sell the top, through technical analysis, we can safely and systematically play the middle, which offers alpha and diversification to modern day portfolio management.

On-Chain Analysis

For those that are not familiar with on-chain data, it offers unique fundamental analysis within crypto, and is a relatively new field of study. We partnered with WealthUmbrella, a team of machine learning engineers and professors, to provide this level of analysis within the crypto space. According to WealthUmbrella, the underlying strength that our technical analysis is picking up on is also being supported within on-chain data. The below section was written by Vincent Duchaine, CEO of WealthUmbrella.

The Spot Bitcoin ETF approval in January triggered a rare move in Bitcoin that quickly brought us to new all-time highs (ATH) around $73,000. This move also created some of the most overbought conditions we have seen throughout Bitcoin’s history. One of the key indicators we use to gauge these overbought levels is what we call our Metcalfe's law discount/premium model, which measures the value of Bitcoin’s network through the increase/decrease in active users.

At the prior ATH in Bitcoin, this indicator gave us a reading of 3.3 standard deviations ahead of the fair price. For reference, this was in the 99.9th percentile of all Bitcoin readings and is consistent with what we see around cyclical tops in Bitcoin.

Source: WealthUmbrella

In light of this extreme reading in one of our key metrics, we still maintained “that the bull cycle in Bitcoin will likely move higher.” This was the right call, as we have been in a large consolidation since. The current correction has now allowed our Metcalfe's law discount/premium model to cool down to a level that is consistent with a healthy, which we typically see in an on-going bull market.

Source: WealthUmbrella

In fact, the last time we reached such a reading was in October 2023, when Bitcoin was trading around $29k. Bitcoin's price then climbed 69% to a price of $49k, before its first large consolidation in the current bull cycle.

As Bitcoin's market cap increases, the chances that we continue to see vertical moves of that magnitude does decrease. If Bitcoin climbs at least $20k, like in the previous run, this would still put Bitcoin at around $90k before the next consolidation. This, we believe, is a conservative assumption.

Source: WealthUmbrella

As stated earlier, while the above metric was flashing a warning, none of our other cyclical top indicators agreed. For example, our primary cyclical top indicator, which we call the Kwiatkowski top/bottom indicator, was nowhere near the reading that we see around major tops. This indicator measures the different Bitcoin capitalizations, as well as Bitcoin miner revenue to Hashrate ratio, and has a remarkable correlation with significant tops and lows.

More encouraging, this indicator is now finding support in areas that are more consistent with early bull markets, let alone major tops. It recently went to a reading where Bitcoin has always bounced back in a bull market over the last two cycles. This suggests that $52k was likely the bottom of that correction.

Source: WealthUmbrella

These specific indicators helped us successfully call the bottom when Bitcoin was around $16k in December 2022, and they kept us on the right side of the recent correction when many were calling for a major top.

This is further supported by the supply and demand equation in Bitcoin that is now back in a healthy relationship. Regarding demand, while the net buying volume in the ETFs is starting to pick up, the amount of newly created accounts with a non-zero balance seems to have bottomed out and is now climbing. I personally believe that the attention Bitcoin is currently receiving in the ongoing US presidential race lends legitimacy to Bitcoin and will continue to attract more people to this asset.

Source: WealthUmbrella

On the other side of the equation, supply is now more scarce following the halving, with now only 450 Bitcoins being mined per day. Following the Spot ETF approval, the number of coins that did not move for more than a year was consistently dropping, indicating that long-time market participants were willing to finally sell. This movement has now come to a stop and, if we exclude one single massive transaction that occurred in June where a huge amount of very old coins moved, this number is now significantly on the rise.

Source: WealthUmbrella

In summary, we have remained steadfast in our assertion that bitcoin has been and remains a buy. To transparently discuss ongoing buy plans is rare and very few investors offer this level of real-time transparency on positions they already own. We were one of the first firms to offer real-time trades on this volatile asset since 2019, but most recently we offered granular and concise discussions around our buy plans in December 2022, and since have continued to discuss our buy plans in April 2023, December 2023, April 2024. We are now asserting, yet again, that Bitcoin is a buy in July of 2024.

Our technical analysis is suggesting that we are completing a correction within a large and unfinished uptrend. The next dip, we believe, will be the last opportunity to buy before we resume going vertical. Our Elliott Wave analysis is in agreement with WealthUmbrella’s unique on-chain analysis, which sees readings that are consistent with lows, not highs. This is while we are measuring a notable rise in demand, with consistently less supply. This is the basic condition for seeing a good uptrend in Bitcoin. With this information, we are confirming our price target of $106,000 – $190,000.

If you are interested in our next buy plans for Bitcoin and other cryptocurrencies, then we encourage you to join us Thursday August 8th at 4:30 PM EST for a premium webinar with special guest Vincent Duchaine, CEO of WealthUmbrella. Together, we will discuss where we see the crypto market going, and what it will take to end the current bull cycle. Sign up hereSign up here

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

Recommended Reading:

Lam Research FQ4 Earnings: Margins Recover Yet DRAM Declines

Posted on August 1, 2024June 30, 2026 by io-fund

Lam Research followed in the footsteps of WFE peer KLA with a top and bottom line beat in fiscal Q4, while guiding fiscal Q1 revenue slightly above consensus. Margins rebounded in fiscal Q4 with management forecasting fiscal Q1 GAAP operating margin to expand from Q4’s print. China’s revenue contribution dipping sequentially, which was a main focus on the call.

Lam slightly boosted its WFE outlook for calendar 2024, now seeing WFE spending in the mid-$90 billions, compared to its view for the low to mid-$90 billions in the March quarter. Management said the increased view was primarily driven by domestic China shipments, though recent news with the US targeting more restrictions on China’s ability to access HBM may play a negative role down the line, if implemented.

Lam sees foundry, logic, DRAM and NAND to all rise YoY in calendar 2024. Management noted that memory’s WFE will be “biased” towards tech upgrades, meaning the recovery still may not yet be fully under way as memory’s contribution dipped QoQ.

Overall, we are likely to close Lam as we are not comfortable with high exposure to China, combined with the decline in DRAM.

Revenue and EPS:

Lam returned to topline growth in its fiscal Q4, reporting YoY revenue growth of 20.6%, though QoQ growth was marginal, at just 2.1% QoQ. Lam’s fiscal Q1 guide points to revenue growth in the high-teens, or approximately 16.4% YoY at midpoint.

Q4 revenue of $3.87 billion beat estimates by $40 million, with Lam reporting YoY revenue growth after five consecutive quarters of declines.
FY24 revenue was $14.91 billion, down (14.5%) YoY.
For fiscal Q1 (September 2024 quarter), Lam guided for revenue of $4.05 billion, +/- $300 million, for YoY growth of 16.4% and QoQ growth of 4.6%. This was slightly ahead of analyst estimates for $4.02 billion.
This quarter, GAAP EPS of $7.78 beat estimates by $0.42, representing YoY growth of more than 30% and QoQ growth of 6%.
Adjusted EPS of $8.14 beat estimates by $0.55, representing YoY growth of more than 36% and QoQ growth of nearly 4.5%.
FY24 GAAP EPS was $29.00, down (12.7%) YoY.
For Q1, Lam guided GAAP EPS of $7.79, +/- $0.75, for approximately flat QoQ growth and 17% YoY growth.
Adjusted EPS was guided at $8.00, +/- $0.75, for a QoQ decline of (1.7%) but YoY growth of nearly 17%.

Margins:

Lam’s margins expanded sequentially down the line, as operating leverage improved while gross margins remained flat QoQ. This came despite China’s revenue contributing shrinking 300 bp to 39%, with management previously citing China customer mix as a gross margin tailwind. As stated, there were many questions about China’s revenue being smaller this quarter.

GAAP gross margin was 47.5% in Q4, flat QoQ but up 200 bp YoY. Management guided to a gross margin of 47% next quarter, and an incremental headwind in December.
Adjusted gross margin was 48.5% in Q4, down 20 bp QoQ but up 280 bp YoY. Both figures came at the high end of management’s guided range for the quarter.
For Q1, GAAP gross margin was guided at 46.9%, for a YoY and QoQ contraction of 60 bp. Adjusted gross margin was guided at 47.0%, a 150 bp QoQ and 90 bp YoY contraction.
GAAP operating margin was 29.1%, a 120 bp QoQ and 250 bp YoY expansion.
Adjusted operating margin was 30.7%, a 40 bp QoQ and 340 bp YoY expansion — this was the highest adjusted operating margin since Q2 2023.
For Q1, GAAP operating margin was guided to be 29.4%, for a QoQ expansion of 30 bp while remaining flat YoY. Adjusted operating margin was guided to be 29.5%, a 120 bp QoQ and 60 bp YoY contraction at midpoint.
GAAP net margin was 26.3%, up 80 bp QoQ and 130 bp YoY, and reaching the highest level since Q2 2023, as improved operating margin aided bottom line growth. Adjusted net margin was 27.6%, up 60 bp QoQ and 260 bp YoY.

For the full year, GAAP gross margin was 47.3%, up from 44.6% in FY 2023; adjusted gross margin was 48.2%, up from 45.3% in FY 2023 as gross margins remained strong on China customer mix.

FY 24’s GAAP operating margin contracted 110 bp to 28.6%, as FY 23’s first half strength more than offset back half weakness.

Cash and Debt:

Operating cash flow was $862.4 million in Q4, for a margin of 22.3%. OCF declined (23.2%) YoY, with the quarter seeing a ($260 million) detrimental impact from changes in operating assets and liabilities.
Free cash flow was $761.7 million, for a margin of 19.7%, a nearly 1300 bp QoQ contraction, primarily as a result of the decline in OCF.
Inventory was $4.22 billion, down slightly from $4.32 billion in the prior quarter.
Cash and equivalents totaled $5.85 billion.
Debt totaled $4.98 billion.

Key Metrics:

Interestingly, Lam reported DRAM and NVM revenue contribution shrinking QoQ, while logic/other revenue surged QoQ.

As a percentage of systems revenue, which was $2.17 billion:

Foundry accounted for 43% of revenue, down from 44% last quarter.
DRAM accounted for 19% of revenue, down from 23% last quarter. Two quarters ago, DRAM was 31% of revenue.
NVM accounted for 17% of revenue, down from 21% last quarter.
Logic/other accounted for 21% of revenue, up from 12% last quarter.

Combined, memory accounted for 36% of systems revenue, down from 44% last quarter.

Geographically, Lam saw China revenues moderate QoQ, while Taiwan and US revenue contribution rose substantially QoQ.

China accounted for 39% of revenue in Q4, down from 42% last quarter, and also reaching its lowest share of revenue in fiscal 2024.
Korea accounted for 18% of revenue, down from 24% last quarter, potentially as one of the leading factors in memory’s weaker revenue contribution on a QoQ basis.
Taiwan accounted for 15% of revenue, jumping from 9% last quarter.
The US accounted for 10% of revenue, rising from 6% last quarter.

Earnings Call:

DRAM Decline is Odd

The decline in DRAM is a concern as demand is surging for HBM3 and HBM3e, driven by memory being the most critical component in the upcoming generation of GPUs and ASICs. We expected more from Lam in this report considering HBM3 and HBM3e is the catalyst for memory stocks Micron, Samsung and SK Hynix, who Lam supplies.

Management stated that “The decline in the memory segment was mainly attributable to DRAM. DRAM came in at 19% of systems revenue compared with 23% in the March quarter as investments in mature nodes declined in the June quarter.” Theoretically, this decline in mature nodes should be offset by growth in HBM.

Per a previous Lam analysis in April Lam was expecting DRAM to triple YoY: “Lam is expecting its “HBM-related DRAM and packaging shipments to more than triple year-on-year and outpace WFE growth in this segment by a significant margin” in 2024.

CEO Timothy Archer added that in HBM, Lam is seeing “very, very strong demand. I think that whether or not at some point, it's shipping above peak, I think that this AI market is continuing to evolve at a very, very fast rate. And all we're focused on right now is ensuring we are building out our own capacity and capabilities. And ensuring that we maintain that technology leadership that's allowing us to hold 100% market share of the TSV formation in HBM.”

We were not the only ones expecting more from the DRAM segment, as one of the first questions on the call asked for more discussion on why DRAM isn’t showing up in the report. The answer was not clear, rather answering with what their technology can solve rather than addressing what is likely a competitive issue, where another supplier is taking the business (my best guess).

Question
Timothy Arcuri (Analysts)

[…] Can you just talk about — I know your leverage to the advanced packaging part of the HBM dollars being spent but that's still a pretty small piece of it. So can you just maybe give a chance to kind of discuss some of the view that you're not very levered to DRAM and give us a sense of maybe where you're investing and where you think you can gain share in DRAM.”

Answer
Timothy Archer (Executives)

[…] The other side of it, a lot of the excitement around DRAM is related to HBM. And there, as you commented, we play extremely well with our strong position in both TSV, etch as well as the TSV electroplating. And I think that we don't see any change in that strong position going forward. So we get the benefit both from the scaling and architectural changes that are occurring in DRAM going forward and from the advanced packaging and HBM related expansion. And all of these — on both of those sides are multiplied by the fact that you get fewer bits per wafer. And so everybody recognizes you're going to need a lot more DRAM wafers processed going forward. And ultimately, that translates into more equipment from LAM.

-End Quote

Another analyst asked for clarification on if DRAM should “at some point, come back strongly.” The CEO stated that “we see DRAM demand for DRAM equipment continuing to grow through 2025 and probably well beyond that.”

China is the Opportunity; but also a Major Risk

As stated, China revenue was at 39% down from 42% last quarter. To help illustrate the importance of China to Lam, the word was stated 33 times in the earnings call compared to HBM being stated 14 times. Not only is China a risk politically, but the revenue can be lumpy for Lam.

Source: Lam’s Quarterly Earnings Slides

There was a solid question on the call that helps investors understand the risk in terms of losing a customer due to restrictions, and why Lam may be lagging some of its peers

Question
Atif Malik (Analysts)

Doug, if I look at the 2023 year-over-year China sales growth among the big 5 equipment makers. All of them are up quite well. ASML is up like 250% and the U.S. peers are up in teens or 20%, but you guys were down 11% total China sales in 2023. And this year, you're expecting China sales to be up. So I'm just trying to understand the dynamics last year. Were this just a function of maybe NAND spending and the NAND project not being active or are there competitive elements in China that are working against you?

Answer
Douglas Bettinger (Executives)

Atif, I'll remind you that perhaps our largest customer got restricted when the regulations came out, our NAND customer in China. That customer was pretty strong in '22, went away in '23. So the year-over-year comparisons you're making, you've got to factor that in. And then the strength we're seeing '23 to '24 is a different mix entirely, really not any NAND in China to speak of, at least not domestic China. I don't know if that helps you, but make sure you're thinking about that.

Conclusion:

The decline in DRAM could be short-lived, to where the segment bounces back quickly next quarter. However, being in the midst of such strong HBM growth, it feels odd to see DRAM decline in light of the strong commentary we saw in the first half of the year.

In addition, Lam’s exposure to China is problematic. Theoretically, it would be harder for Lam to replace China revenue than a memory company that is sold out of supply 6-8 quarters out, or a GPU design company that is also seeing outsized demand. For stocks that have China risk, we’d rather own TSMC, for example, or more of Micron if we seek exposure to memory, or even Nvidia for the clear capex raise we got from Microsoft and Meta.

Our plan is to close Lam and to give the I/O Fund team the task of re-allocating it to a stock with less risk, and with its AI-related segments reporting more growth.

Damien Robbins, Equity Analyst for the I/O Fund, contributed to this analysis.

Recommended Reading:

Cloudflare Q2 Earnings Preview: With Bated Breath for FY Outlook

Posted on August 1, 2024June 30, 2026 by io-fund

Cloudflare will report its results on August 1st. Management guided revenue in the range of $393.5 million to $394.5 million, representing YoY growth of 27.7% at the midpoint. Despite the Q1 revenue beat of 1.4%, management did not raise the FY guidance due to the mixed macroeconomic environment and geopolitical uncertainty. They remained cautious and said that the short term is uncertain, and the long term is bright.

Cloudflare is at an advantage as the company has visibility into many industries and had rightly given early warning of the slowdown in 2022. They reassured investors in the last earnings call during the Q&A that the level of concern is not the same as in Q1 2022 but remains prudent.

We see pockets of weakness (Tesla, for example, continues to face the effects of high interest rates), yet we will need to look to more commentary from Cloudflare to understand if the situation has grown worse or better as it’s not clear from our vantage point what spooked the CEO last quarter.

Revenue

The analysts expect Q2 revenue to grow 27.9% YoY to $394.5 million. Revenue growth will decelerate from 30.5% YoY to $378.6 million in Q1. It will further decelerate to 26.1% YoY growth in Q3 and 25.9% in Q4 and then accelerate to 26.2% growth in Q1 FY 2025. This is actually quite strong for best-of-breed cloud as many >40% revenue growth cloud companies have dipped <20% in recent years.

Margins

The Q1 gross margin improved 180 bps YoY and 50 bps sequentially to 77.5%. The adjusted gross margin improved 170 bps YoY and 60 bps sequentially to 79.5%. This was higher than the management’s long-term target of 75% to 77%.

The operating margin was (-14.4%) compared to (-16.3%) in the same period last year and (-11.8%) in the previous quarter. The adjusted operating margin improved 450 bps YoY and 20 bps sequentially to 11.2%. The operating expenses as a percentage of revenue were reduced by 300 bps YoY due to the focus on higher productivity and greater efficiency in the operations. Sales and marketing expenses as a percentage of revenue reduced by 100 bps, R&D expenses reduced by 200 bps and general & administrative expenses reduced by 100 bps YoY. The adjusted operating margin guide for the next quarter is 9%, up 240 bps YoY and down 220 bps sequentially.

The net loss was (-$35.5) million or (-$0.10) per share compared to (-$38.1) million or (-$0.12) per share in the same period last year. The adjusted net income was $58.2 million or $0.16 per share compared to $27.2 million or $0.08 per share in the same period last year and beat estimates by 22.6%. The guide for the next quarter is $0.14.

The analysts expect adjusted EPS to grow 40.7% YoY to $0.14 in Q2 and decline by (-6.3%) YoY to $0.15 in Q3.

Cash Flow and Balance Sheet

Q1 operating cash flow was $73.6 million or 19% of revenue compared to $36.41 million or 13% of revenue in the same period last year.
Free cash flow was $35.6 million or 9% of revenue compared to $13.9 million or 5% of revenue in the same period last year as it benefited from an uptick in collections on accounts receivable. Network capex was 8% in the recent quarter. Management expects network capex to be 10% to 12% of revenue in 2024, including the rollout of GPU capacity to every location.
The company has cash and available-for-sale securities of $1.72 billion and debt of $1.28 billion compared to $1.67 billion and $1.28 billion in the December quarter.

Key Metrics

RPO

RPO increased 8% QoQ and 40% YoY to $1.343 billion. This is an acceleration from growth of 37% YoY in the previous quarter.

Billings

The company’s primary focus is on RPO as a more comprehensive measure of its business. We track billings since they are reported for other cybersecurity stocks. Billings grew by 24% YoY and declined by (-7%) sequentially to $387.6 million and a deceleration from 28% YoY growth and 15% sequentially in the previous quarter.

DBNRR

The dollar-based net retention rate was 115% in Q1, flat QoQ but down from 117% in the year-ago quarter. Management expects the decelerating trend to stabilize around the current levels.

Customers

Customers with greater than $100,000 annualized revenue grew by 33% YoY to 2,878. The number of customers has been trending higher sequentially even though the growth decelerated from 35% in the previous quarter.

Matthew Prince, CEO and co-founder, said in the earnings call, “We added 122 new large customers, those that pay us more than $100,000 per year, and now have 2,878 large customers, up 33% year-over-year. Revenue contribution from our large customers during the quarter increased to 67%, up from 62% in the first quarter last year. Digging into our largest customers, we added a record number of net new customers year-over-year spending more than $100,000, $500,000 and $1 million on an annualized basis. We are successfully moving upmarket and becoming a larger and more strategic vendor to more and more of our customers.”

Paying customers grew by 17% YoY to 197,138 and have been growing at a similar rate in the last three quarters.

Cloudflare is reporting 2 million developers on their Workers platform. This is up from “more than a million” in a press release in November of 2023 and is up from 450K developers in May of 2022 per a corporate blog. Per the opening remarks: “The last few months were incredible for the entire workers' ecosystem. First, we crossed over 2 million active developers building applications on Cloudflare Workers. Second, in April, we GA-ed a number of key products like DY, our serverless SQL database; hyperdrive, which makes any traditional database perform like it's globally distributed; and Workers AI, which allows developers to run and tune AI models across our global network.”

Other key points to watch

FY Outlook

Cloudflare has good visibility in various industries since the company is a leading CDN player. Management has been cautious due to macroeconomic uncertainty and geopolitical tension, maintaining the FY 2024 guide of $1.648 billion to $1.652 billion, representing a YoY growth of 27.3% at the midpoint. However, the market expected a rise in the FY 2024 guide, particularly after the strong Q1.

Matthew Prince said in the earnings call, “I feel extremely confident and clear in the long-term opportunity that Cloudflare has in front of us. In the short-term, however, my crystal ball is less clear. We see a lot of signals based on our privileged position running a good chunk of the Internet. Even without that visibility, if you've been watching the news at all, it's clear that the near-term outlook for the world is uncertain, increasing tensions in the Middle East, no end in sight from the Russia-Ukraine war and potential signs of instability in Asia. It's not at all certain on anything we see that things will get worse, but we do know from even recent history that macro factors can impact short-term sales trends.”

During the Q&A, Matthew Prince clarified that they didn’t see a clear signal of a slowdown that they saw in 2022. He described the crystal ball as cloudy. “We see things that worry us, but we also see things that give us some level of optimism. And so, I think describing the crystal ball as cloudy is the right thing.”

Customer wins

The management highlighted strong customer wins during the Q1 earnings. Some of the notable include:

“The National Cyber Security Centre, the UK's technical authority for cyber threats, signed a three-year contract with Cloudflare to deliver its protective domain name service. PDNS protects over 1,400 UK organizations in central government, local government, healthcare and emergency services from malware and cyber threats.”

“A leading technology company expanded their relationship with Cloudflare, signing a three-year, $40 million pool of funds contract, $8.5 million of which are expansion.”

“A large international energy company signed a five-year, $4.5 million contract. This new customer is going all-in with Cloudflare's SASE platform with 6,000 Zero Trust seats along with CASB, DLP, browser isolation, Magic WAN and Magic Firewall.”

Network capex

The company has been efficiently managing capex despite the GPU rollout and benefitting from the uniqueness of its platform to onboard new workloads. Management mentioned that they don’t need capex like the hyperscalers. Matthew Prince highlighted in the earnings call that they sell more high-margin products like Zero Trust and SASE that require lesser capex. They also made the right decision to reserve space, sensing the AI opportunity. The company now only needs to plug the GPU cards into the servers, freeing up the capex to invest in other areas. Also, they note that the inference tasks do not require cutting-edge GPUs that are in short demand, so the company has more flexibility in choosing between different GPU vendors.

Network capex was 8% of the total revenue in Q1 and has been at the same level in the last three quarters. Management expects network capex to be 10% to 12% of revenue in 2024, including the rollout of GPU capacity to every location.

Valuation

The company trades at a P/S ratio of 18.9 and a forward P/S ratio of 16. The average P/S ratio since the company’s listing in September 2019 is 33. We continue to monitor the 20x forward P/S level that ‘best-of-breed’ cloud stocks struggle to maintain, particularly when the macroeconomic conditions worsen.

Conclusion

The company sits in an enviable position for AI inference at the Edge. The developer growth of Workers to 2 million was the highlight in the last earnings report. We continue to monitor the key metrics and the outlook for the year. We liked the management’s response on network capex as it shows they have a strategy. It’s showing up today with cash flows remaining at an acceptable percentage of revenue – although, notably, we want to stay neutral here regarding what the network capex reports in the future and continue to scrutinize cash flow margins.

Royston Roche, Equity Analyst at the I/O Fund, contributed to this article.

Recommended Reading:

Microsoft Fiscal Q4 2024 Earnings: Capex Surges QoQ; Azure Remains Durable

Posted on August 1, 2024June 30, 2026 by io-fund

The reason that AI semiconductors were deep in the green today is because Microsoft announced strong QoQ increase to its capex for AI infrastructure. Microsoft’s capex increased 36% sequentially and 78% YoY to $19 billion in Q4. Capex was $14 billion last quarter, where it grew 22% sequentially.

Microsoft Fiscal Q4 Financials:

Revenue and EPS:

For next quarter, management guided to $64.3 billion at the midpoint, which is below analyst estimates of $65.30 billion
GAAP EPS of $2.95 beat estimates by $0.02, representing YoY growth of 10%. Non-GAAP EPS of $2.95 beat estimates by $0.01.

Segment Revenue:

Productivity and Business revenue was $20.3 billion, up 11% YoY, driven by 13% growth in Office 365 Commercial. Growth came in 140 bps ahead of the midpoint of the guided range.
Intelligent Cloud revenue was $28.5B, up 19% YoY, driven by Azure and other cloud services revenue growth of 29%. Growth came in in-line with the midpoint of the guided range.
More Personal Computing revenue was $15.9 billion, up 14% YoY. Windows revenue increased 7% with OEM revenue growth of 4% and Commercial products and cloud services revenue growth of 11%, while devices revenue decreased (11%). Xbox content and services revenue increased 61% YoY driven by 58% of net impact from the Activision acquisition. Growth came in 320 bps ahead of the midpoint of the guided range.

Guidance on Segment Revenue:

Productivity and Business revenue guided to $20.45 billion at midpoint for growth of 9.2% to 10.8% YoY. This would be a QoQ deceleration of 100 bps in growth rate, at the midpoint.
Intelligent Cloud revenue was guided to $28.75 billion at midpoint for growth of 17.9% to 19.1% YoY. This is a deceleration of 50 bps in growth rate, at the midpoint.
More Personal Computing revenue was guided to $15.1 billion at midpoint for growth of 9% to 12% YoY. This is a deceleration of 350 bps in growth rate, at the midpoint.

Margins:

Microsoft’s More Personal Computing segment experienced the largest QoQ operating margin decline, down 639 bp QoQ to 30.9% due to impact from the Activision acquisition.

Gross margin of 69.6% was down from 70.1% in the year ago quarter. The guide for next quarter is 68.8%.
Operating margin was 43.1%, down from 43.2% in the year-ago quarter. Operating margin is guided for 45.1% next quarter.
Net margin was 34%, down from 35.74% in the year-ago quarter. Net margin is guided to improve to 35.7% next quarter.
Productivity and Business operating margin was 49.9%, down 191 bp QoQ but expanding 42 bp YoY.
Intelligent Cloud operating margin was 45.09%, down 175 bp QoQ but expanding 120 bp YoY
More Personal Computing operating margin was 30.9%, down 639 bp QoQ due to impact from the Activision acquisition

Cash and Debt:

Operating cash flow was $37.19 billion, up 29% YoY driven by strong cloud billings and collections.

Free cash flow was $23.3 billion, up 18% YoY reflecting higher capital expenditures to support cloud and AI offerings.

Microsoft returned $9.78 billion to shareholders in the form of dividends and share repurchases.

Key Metrics:

Commercial RPO grew by 20% YoY to $269 billion. This compares to 20% growth last quarter and 19% YoY growth in the year ago quarter.

The next-gen analytics platform, Microsoft Fabric, has over 14,000 paid customers, up 20% QoQ.

Azure Arc, a tool that allows organizations to manage resources not hosted on Azure, has 36,000 customers, up 90% YoY and 9% QoQ.

Power Platform, a collection of low-code development tools, saw MAUs rise 40% YoY to 48 million. 480,000 organizations have also used the AI-powered capabilities in Power Platform, up 45% QoQ.

Earnings Call:

Azure AI Growth as a Leading Indicator of Capex Investment:

Given this significant spending, analysts are questioning whether monetization is going to match the level of investment.

Question:

Keith Weiss (Analyst)

Answer:

Satya and Amy (Management)

In a further answer, management noted that they can adjust capex investment with little impact on revenue growth.

Factors Driving Soft Q4 Azure Growth Expected to Persist

Answer:

Amy (Management)

Broader Applications of Copilot

Question:

Mark Murphy (Analyst)

Answer:

Satya (Management)

Management noted that they aim to extend the productivity benefits seen with GitHub Copilot to a broader population of knowledge workers through M365 Copilot.

Valuation

Microsoft could see about 10% to 15% upside from here, at which time, it will be trading at a forward PE where the stock has met resistance two times prior.

Conclusion

Microsoft’s report shows continued growth in all the right areas and supports our large allocation to AI data center stocks. Ultimately, we closed Microsoft earlier this month following our July quarterly webinar where we expressed valuation concerns. Pausing Microsoft in our portfolio is likely to be short-lived as we see the company as a clear winner in AI, with AI driving an increasing amount of Azure’s growth and with Azure continuing to be capacity constrained. We’ve also been quite vocal that enterprise is where the growth in AI will come from, and Microsoft is unique among the FAANGs for its leading position with enterprise customers. We continue to see Microsoft as a quality company, yet we are rolling the dice to see if we can get a lower entry.

Richard Chu, Equity Analyst at I/O Fund, contributed to this analysis

Recommended Reading: