Seattle, Washington – Microsoft, a tech giant based in Seattle, has seen a shift in stock performance since the last analysis in January. The stock has shown a minimal increase of 0.18% compared to the S&P500 index. Despite this, after adjustments following the Q2 FY24 earnings release, the total return decreased by 0.19%. The author has changed their stance to ‘Neutral/Hold’ following this development, expressing some frustration with the high turnover experienced lately. However, steps have been taken to reduce turnover and maintain accurate perspectives in the future.

The belief that Microsoft would take an early lead in the AI boom has persisted since May 2023. Recent operational execution momentum has reinforced this belief, leading to an upgrade in stance to a ‘Buy’. Several themes have become clearer over the past two quarters, supporting this upgraded stance. Among these themes are the growing strength of Microsoft’s Azure over its competition, the potential for ARPU growth to drive multiple expansion, and indications in the relative technicals pointing to a breakout in the weekly range.

In the competitive landscape of cloud vendors, Microsoft has been gaining ground, particularly against Google and Amazon. The company’s share has grown from 22% to 25% over the last four quarters, with notable increases in both the size and frequency of major Azure deals. Management’s positive outlook and strategic focus on Azure suggest ongoing success in the cloud business, positioning Microsoft for further growth in comparison to its competitors over the next few years.

The infusion of AI-related enhancements into Microsoft’s Office 365 products has facilitated pricing increases, leading to ARPU growth. With the sticky nature of enterprise software and productivity tools, gradual price hikes are expected to drive long-term earnings growth and support multiple expansion. Additionally, a breakout in the weekly range against the S&P500 indicates positive momentum for the stock.

A key monitorable for Microsoft’s future success lies in the company’s cloud gross margin levels, especially with the increasing contribution from lower-margin Azure services offsetting potential pricing hikes in Office 365. Despite this concern, the overall outlook remains bullish for Microsoft, with a focus on Azure’s competitive strength and the opportunity for continued market share gains and valuation upside. As a result, the current rating for the stock is a ‘Buy’.