Microsoft ‘significantly outperforms’ most tech and software companies: analyst


Rishi Jaluria, RBC Capital Markets Software Equity Analyst, joins Yahoo Finance Live to discuss Google and Microsoft earnings reports, cloud revenue, competition with Amazon Web Service and China.

Video Transcript

SEANA SMITH: Because we want to dig a little deeper into the revenue we just received from Microsoft. For this, we would like to call on Rishi Jaluria, an equity analyst at RBC Capital Markets software. Rishi, it’s great to see you. So top and bottom are missing. Smart cloud revenue there, which includes Azure, is $20.91 billion. The estimate was just over $21 billion. Still, we’re seeing a pretty muted reaction, which Dan was just talking about in the stock. I’m curious, do you agree with what Dan was saying? Why do you think that is?

RISHI JALURIA: I do. And by the way, thank you very much for inviting me. Great to see you again. I would say there are probably two reasons why I think Microsoft is holding up relatively well. Number one is one of the biggest drivers of loss, it really is the change, isn’t it? The US dollar has strengthened so much over the last 90 days between March and June that the US dollar and the euro are at par. The Japanese yen kind of fell off a cliff against the US dollar.

And I think most investors are looking at everything downside on a constant currency or currency neutral basis. So I think that’s the number one piece, that’s what’s driving this misfire. It’s not a fundamental weakness. The macro deterioration has not yet really manifested itself in numbers.

I think number two is the Azure number, right? You know, maybe that was a little light on what they talked about 90 days ago. But just considering what’s going on with the macro environment, Azure growth of 46% in constant currency is actually pretty solid, isn’t it? I think it’s better than people feared. And I think that speaks to the resilience of the model, doesn’t it? I mean, actually, we also saw Google reporting today. And their Google Cloud numbers are down about 8 points on a reported basis.

So that’s definitely one of the things that Azure seems to be picking up well. And remember, because Azure is a consumer model, any macro impact that showed up in June should show up right away. It’s not like a typical subscription company, where there’s a significant lag between when an impact occurs and when it manifests in numbers.

DAVE BRIGGS: Yeah, regarding your point about the strengthening dollar, thematically, that’s something we’re going to hear about all week, and the impact of companies that have that exposure. But since the start of the year, the shares are down 25%. How much of the bad news was already integrated?

RISHI JALURIA: Yeah, look, I think you think a decent amount of bad news was already factored in, right? I’ve certainly spoken to investors who had issues, or concerns are more likely around Microsoft and moving forward and all that sort of thing. I would say Microsoft is – even though it’s down 25% year-to-date, it’s significantly outperformed most tech stocks and certainly most software companies. And I cover a lot of software companies that have lost 50%, 60% since the beginning of the year.

And I think that’s because a lot of investors see Microsoft as a safe haven, right, like a place to hide because if you’re willing to take the long view, I think there’s a great thesis that if Microsoft, with its strong corporate focus on secular tailwinds, not only holds up better, but actually pulls out of a recession, it could end up in a stronger position because you have the ability to consolidate budgets.

DAN HOWLEY: Rishi, I want to know what this potentially means for Amazon and its revenue, right? You are looking at AWS. That’s basically what’s driving this stock, aside from the fact that e-commerce has plummeted following this massive expansion. But we see Microsoft doing well here with Azure. Yes, Google’s cloud was a little off, but, you know, AWS and Azure are the best when it comes to cloud. Does this mean we could see a good result from Amazon on the cloud side? And is this, then, a silver lining for investors?

RISHI JALURIA: Yeah, I think so, right? I think the readings from here for AWS, right despite all I can nitpick about Google Cloud and the [INAUDIBLE] There, these are still pretty solid numbers: almost 40% growth in costs and currencies on Google Cloud. So pretty strong numbers on Azure and GCP.

And I think that bodes well for AWS. The only caveat I would give, and if I were an investor in Amazon I would be concerned, is that AWS has a lot of exposure to VC-backed tech startups, right? And that’s where we’re already seeing, not just hiring freezes, but a lot of layoffs, right? Think of all the particularly consumer-focused tech companies that are laying off a significant number of employees. This is perhaps the only caveat I would have with AWS. And I would actually expect to see AWS post more deceleration than what Azure just posted because of this exposure.

RACHELLE AKUFFO: And we know we keep hearing about the China factor. Clearly, the lockdowns continue, and have recently extended to Shenzhen. What are you watching in terms of exposure to China for some of these tech multinationals, in particular?

RISHI JALURIA: Yeah, look, I think the good news with Microsoft is that they don’t rely heavily on China as a source of revenue, do they? It’s more of a kind of supply, isn’t it? It’s very different from Apple in that regard. So, in general, the impact of lockdowns in China is mostly on their ability to manufacture hardware. And we’ve seen it with Windows’ low OEM number and everything in the more personal computer line kind of way.

I think it will show up in some of the hardware devices, right? Think of actual Xbox consoles. Think surface. And I think the longer this stuff goes on in China, the more we’re going to see those numbers continue to be maybe lower than expected. But above all, the big engine of Microsoft remains the Cloud.

So I think as long as the cloud business is intact, as long as Azure and Office 365 and Dynamics remain pretty positive numbers, I think the stock will be fine despite the ongoing issues in China and what that means for the side company equipment.

RACHELLE AKUFFO: Well, a big thank you. We see their shares still relatively stable at the moment, but at least in the positive. Many thanks, Rishi Jaluria. Thank you for your time this afternoon.



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