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How AI is Transforming Microsoft into THE Technology Stock

January 31, 2024

First, let us examine the chart for the world’s most valuable company. The good news is that it looks powerful. On the charts, Microsoft is a clear buy. Amazingly there has only been one significant golden cross buy signal in the nearly 40 years these shares have been trading. Latterly the m/a lines have been steepening which is often a positive development.

Microsoft is a huge business. Quarterly revenue was $66.2bn. Operating income rose 33pc to $27bn. As a business, Microsoft is a class act.

“We’ve moved from talking about AI to applying AI at scale,” said Satya Nadella, chairman and chief executive officer of Microsoft. “By infusing AI across every layer of our tech stack, we’re winning new customers and helping drive new benefits and productivity gains across every sector.”

“Strong execution by our sales teams and partners drove Microsoft Cloud revenue to $33.7bn, up 24pc (up 22pc in constant currency) year-over-year,” said Amy Hood, executive vice president and chief financial officer of Microsoft.

Earnings release FY 24, Q2, 30 January 2024

Spending on r&d and sales and marketing reached almost $13.4bn, which helps explain the continuing strong growth. Since 2016 the shape of the business has changed dramatically. In Q1 2016 products revenue of $15.75bn was over three times services revenue of $5.16bn. In Q2 2024 this was almost reversed with product revenue of $5.96bn (boosted by the Activision Blizzard acquisition) v services revenue of $13.66bn.

This is important because as a services business, Microsoft can apply AI to dramatically enhance its business, as noted in the quote above.

In the latest quarter, Microsoft generated $18.9bn in cash from operations. These are staggering numbers and give the business great flexibility to take advantage of opportunities.

Don’t be Misled by Analysis Paralysis

I don’t try to analyse Microsoft. The world is full of people who can do that much better than me and I am not sure how valuable it is anyhow. The key points for me are three (a) Microsoft is a great fast-growing business (b) it has an incredible chart and (3) it is playing a leading role in an accelerating technology revolution.

I don’t care if the share price goes up or down after the results. Either way, I think they are a buy.

Strategy – Building a Portfolio for the Ages

Part of what I do on Quentinvest is alerting opportunities to buy individual shares. Microsoft is a good example. I am happy to buy shares I like before or after quarterly results because trying to second guess what effect they are going to have on the price is a mug’s game. Unexpected good results send the price through the roof, expected good results often usher in a period of turbulence but there are no reliable rules. In the end, good performance by the business will send the shares higher over time.

An interesting portfolio strategy which I have been considering is as follows: invest 80pc in QQQ, an unleveraged ETF which tracks the Nasdaq 100; invest 15pc in QQQ3 which does much the same turbocharged by leverage and daily rebalancing and 5pc in IBIT, an ETF managed by investment giants, Blackrock, which is wholly invested in bitcoin. I think that would be a good buy-and-forget portfolio, especially for people who do not want to watch their investments closely. Hard to do exactly for UK-domiciled investors because of stupid regulations.

Share Recommendations

Microsoft. MSFT Buy @ $403

QQQ. Buy @ $418.5

QQQ3. Buy @ $161.48

iShares Bitcoin Trust. IBIT. Buy @ $24.78

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