The question on investors' lips following Microsoft's (MSFT) earnings call last week is: are substantial capital investments in AI infrastructure justified when growth and margins don't reflect improvements?
Although I'm a long-term bull and reiterate my optimistic stance following the tech giant's results, the stock has been in limbo over the past six months. Some impatient investors have abandoned ship, struggling to acquiesce to the narrative that Microsoft's market performance and investment cases are compelling.
Overall, I view MSFT's earnings results from last week with optimism, given the company is backed by strong commercial bookings and sustained demand for AI services. Given the robust revenue growth and margins, I believe these ongoing investments are enough to support a long-term bullish outlook on Microsoft, which boasts some of the best-in-class business fundamentals of any sector.
Overall, my bullishness on Microsoft remains firm after another solid quarter was reported, which marked the tenth consecutive earnings beat. Microsoft delivered EPS of $3.23 when Wall Street was expecting $3.11.
Additionally, Microsoft reported revenues of $69.9 billion, up 12% year-over-year and $823 million above the consensus estimate. Based on its three segments, the one that grew the most was the Intelligent Cloud business, which jumped 19%. In the consolidated results, gross margins reached 69% -- arguably one of the best gross margins among any businesses in the world -- while Microsoft's operating profit margin jumped to 45% with a total operating income of $31.7 billion. Again, very few businesses can boast such sturdy results.
On the operational side, Microsoft reported commercial booking revenues grew year-over-year by 67% in FYQ2. Even with seemingly rock-solid numbers, it wasn't enough to please the markets, as MSFT stock shed ~6% post-earnings.
Arguably, a great chunk of Microsoft's 31.5x forward earnings multiple is directly related to its progress with AI implementation, particularly in its most profitable segment today -- the cloud business. The Intelligent Cloud segment has been one of the main drivers of the almost 75% share price appreciation over the last two years.