O on Thursday cut its fourth-quarter forecast for profit and revenue, making it the latest U. N to temper expectations for the rest of the year. A stronger greenback typically eats into the profits of companies that have sprawling international operations and convert foreign currencies into dollars.
Microsoft, which gets about half its revenue from outside the United States, lowered its revenue forecast for all three segments, which include Windows products, cloud services and personal computing. Corporate hedging activity has increased as more companies try to guard their profits against the impact of currency fluctuations amid surging inflation. While we'd welcome that development, we're realistic about the challenges in PCs right now. In a note to clients Monday, Bernstein dove deep into Microsoft's Windows business after declining PC shipment data sparked renewed worries about its implications for the tech giant.
However, the firm made the case that Microsoft's cloud computing shift — the core part of the Club's investment thesis — should help cushion the blow to fiscal first-quarter numbers. But with the shift to Cloud, Windows has a become less critical driver of revenue and earnings," Bernstein wrote, adding that Windows has lately seen slower growth with "with consumer Windows having lost share.
Details of Bernstein's case Bernstein listed a number of reasons why it thinks Microsoft won't be hit with the worst-case PC scenario, including that the most pronounced weakness so far has been in lower-end consumer machines. There could also be a timing component at play that investors should keep in mind.
The analyst explained that Microsoft records revenue when PCs using its Windows operating system are boxed and shipped from the manufacturer — not when sold to a consumer. Moreover, Bernstein said an increasing portion of Windows revenue falls under the annuity model, which includes sales of subscriptions that feature Windows as well as Office productivity software.
The revenue in this area is not necessarily linked to the number of PCs sold each year. Club take The decline in PC sales after a few booming years during the Covid pandemic has been on our radar for months. We knew it could weigh on Microsoft in the near term as sales normalize a bit. However, Bernstein made an interesting case about the makeup of Windows revenue, and we see how the analysts could conclude that Microsoft won't be the hardest hit by the PC slowdown.
In this market, we need to keep our expectations in check and be mindful that conditions are constantly changing — not always for the better, as we saw with Club holding Advanced Micro Devices AMD. The chip designer chose to issue preliminary third-quarter results earlier in the month due to weaker-than-expected PC sales, even after management revised lower its industry outlook in early August.
Perhaps more importantly for Microsoft, we remind Club members that our primary reason for investing in the company is its Azure business.
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