Microsoft Q4 2024 Earnings: Cloud and AI Fuel Growth
30-07-24
Microsoft is set to release its full-year Q4 earnings on July 30th 2024, after market close. The company’s cloud and AI segments have been pivotal to its recent growth. The Intelligent Cloud segment, which includes Azure, remains a significant driver of revenue, anticipated to generate $28.7 billion, a 19.5% year-over-year increase. This segment now represents about 43% of Microsoft’s total revenue.
CFO Amy Hood noted during their last earnings call that near-term AI demand currently exceeds available capacity, highlighting the strong market interest.
Microsoft’s total revenue for the previous quarter (Q3 2023) was $61.9 billion, marking a 17% increase from Q3 2023. The cost of revenue increased by 15%, driven by growth in cloud and gaming sectors. Despite this, Microsoft’s gross margin increased by 18% to $43.4 billion, indicating efficient cost management.
Microsoft is expected to report a revenue of $64.4 billion for Q4 2024, marking a 14.5% year-over-year increase. Analysts forecast earnings per share (EPS) to rise to $2.93, up from $2.69 in the same quarter last year.
How Microsoft’s substantial investments in cloud and AI translate into long-term profitability will be a focal point for its large stakeholders. The company’s ability to manage rising expenditures while maintaining healthy margins is reassuring, as is Microsoft’s growing market share in the global cloud infrastructure market, which is now at an all-time high of 25%, just behind Amazon Web Services.
If you believe that Microsoft will continue to generate strong future returns, you may consider gaining leveraged exposure by purchasing a long-dated out-of-money call spread.
Call Spread
Trade Idea
MSFT Cash Price = $425.65 (as of 30/07/2024 at time of writing)
Buy: 1 (number of contracts) x $14.70 (contract price) x 100 (contract size) = $1470 debit
Sell: 1 (number of contracts) x $8.70 (contract price) x 100 (contract size) = $870 credit
Total consideration of $600 (excl. fees + commissions)
Historically, MSFT has risen by over 25% since Jan 2024.
A further 18% increase on the current share price to $500.00 by 17-Jan-2025 expiry, would yield a 316.67% return on your initial investment, valuing the call spread at $2,500 (500 – 475 x 100), yielding a maximum profit of $1,900 ($2,500 – $600) (excl. fees + commissions)
A rise to $500 in the underlying share price would yield a 17.5x greater return on the call spread than buying shares outright.
Maximum loss $600 (excl. fees + commissions)
Defined risk profile, maximum loss is equal to the net option premium paid.
Lower initial outlay in exchange for a capped maximum profit.
Breakeven if underlying share MSFT = $481 @ Expiry 17-Jan-2025 (strike price + net premium paid)
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