Since 2024, microsoft has continued its upward momentum from 2023, becoming the second company after apple to surpass a $3 trillion market cap. On October 30th, in the post-market trading of US stocks, $Microsoft (MSFT.US)$ they will release their latest performance, and their stock price will also face market scrutiny as the performance is revealed.

Each time a company releases its performance, it may also signal a bullish trade or investment opportunity. However, before that, investors need to understand how to interpret its performance. So, how should we assess microsoft's performance? What indicators might have a significant impact on the stock price? In fact, the answer lies in microsoft's development path over the past few years.

We know that for a company to grow and make more money, there are essentially two ways: either increase revenue or improve the operating margin. There is a saying in ancient China, that if both aspects are achieved, then the world can be secured. So what happens when both are achieved?

Microsoft is a prime example of this scenario. From the fiscal year 2018 to 2024, microsoft successfully transitioned from being dominated by personal computer systems business to being driven by cloud computing business; at the same time, its commercial business, including Office 365 office systems, transitioned from a one-time sales business model to a subscription-based saas model.

Against the backdrop of a successful transformation, microsoft's revenue nearly doubled from fiscal year 2018 to 2022, while the net income margin more than doubled. With both factors combined, microsoft's net income grew by more than 3 times, far exceeding the revenue growth rate. Microsoft's stock price also surged nearly 5 times since the end of fiscal year 2018.

Since microsoft's success over the past five years stems from steady revenue growth and continuous improvement in the operating margin, the focus on microsoft's performance still needs to start from these two indicators.

Microsoft's current revenue is mainly divided into the following three parts:

The first part is personal business, which can be said to be Microsoft's traditional business. Although it can provide stable cash flow, the growth rate is slowing down. In the previous three fiscal quarters, there was even negative growth.

Since the PC era is a thing of the past, the market's expectations for this segment have never been high. However, in the first quarter of the 2024 fiscal year, this business grew by 2.5% year-on-year, showing a stabilizing rebound. In the second to fourth quarters of the 2024 fiscal year, the year-on-year growth rate even exceeded 10%, to some extent reflecting the recovery demand in the PC market. In the upcoming new performance reports, we can continue to observe whether the revenue of the personal business can sustain its rebound trend.

The second part is the Intelligent Cloud business. Microsoft's Azure, currently ranks second in the global market share of cloud service providers, second only to Amazon's AWS, and is also the main source of Microsoft's revenue. From the 2019 fiscal year to the 2022 fiscal year, Microsoft's Intelligent Cloud business has maintained growth rates of over 20%, with the growth rate constantly increasing.

However, by the 2023 fiscal year, the growth rate of the Intelligent Cloud business revenue began to decline quarter by quarter, with the year-on-year growth rate dropping to 15%. The good news is that Microsoft's breakthroughs in the field of AI also contribute to the upgrade of cloud services. In the first quarter of the 2024 fiscal year report, benefiting from AI integration, Microsoft's Intelligent Cloud business revenue growth rate began to rebound, with a year-on-year growth of about 19%. By the fourth quarter of the 2024 fiscal year, Intelligent Cloud business revenue reached $28.5 billion, a year-on-year growth of about 18.8%, slightly down from the previous quarter but still maintaining around 19% growth. In the future fiscal quarters, we can continue to monitor whether Microsoft's Intelligent Cloud business can maintain a high growth rate.

The third business segment is Productivity and Business Process, mainly in commercial use, which we refer to as commercial business. Subscriptions to office 365 account for the majority. Microsoft's office software services transitioned from one-time sales of perpetual licenses about 10 years ago to a subscription model, marking a very successful shift in the business model.

The revenue growth from software subscriptions is mainly driven by an increase in the number of customers and price increases. Microsoft rarely raised prices in the past, and revenue growth was mainly driven by customer growth. Due to the monopolistic nature and high stickiness of Microsoft's office systems, existing customers hardly leave, so adding new customers directly leads to growth. Therefore, the growth of Microsoft's commercial business is very stable, with growth rates fluctuating around 15% in the past few fiscal years.

However, in the first two quarters of the 2023 fiscal year, as companies reduced costs and increased efficiency, compressing IT spending, Microsoft's commercial business revenue also fell to a 7% level. Fortunately, the Copilot subscription product powered by AI that Microsoft later introduced, integrated into office, increased the average revenue per user and drove growth in commercial user revenue. Microsoft's commercial business revenue growth rate began to rise again in the third quarter of the 2023 fiscal year, with year-on-year growth rates exceeding 10% in each subsequent quarter.

In the upcoming new performance, the subscription status of Copilot in Microsoft's commercial business segment, as well as the potential accelerated growth of commercial business it brings, may still be the most noteworthy point for us. Microsoft's commercial business, may even replace the Asia vets business, becoming the biggest highlight of Microsoft's various businesses, and may also become the key factor influencing the stock price.

Next, let's look at Microsoft's second key point of focus, the profit margin. Generally, a company's ultimate profit margin is mainly based on net income margin. However, in each performance report, Microsoft only discloses the operating margin for three business modules. The operating margin deducts some non-core related income and expenses as well as income tax to get the net income margin. From the data of the 2018-2022 fiscal years, we can see that Microsoft's operating margin improvement is comprehensive.

Among them, the profit margin of the commercial business is the highest, and the improvement situation is also very stable. The personal business started to show a certain degree of decline in the 2022 fiscal year, which is influenced by industry cycles, and the market may not have high expectations to begin with. However, in the 4 quarters of the 2024 fiscal year, for 3 quarters, the profit margin remained above 30%, showing to some extent the recovery of the industry cycle.

It is worth noting that the profit margin of the Asia vets business also experienced a slight decline in the 2022 fiscal year and maintained a downward trend in the first three quarters of the 2023 fiscal year. However, in the Q4 quarter of the 2023 fiscal year, the profit margin of the Asia vets business began to rebound and exceeded 45% in the first 4 quarters of the 2024 fiscal year, reaching a historical high at one point.

The reason for the previous decline in the profit margin of the Asia vets business at microsoft might be due to the penetration of the cloud computing industry reaching a certain stage, intensifying competition among companies. As a result, microsoft's pricing power may have declined, forcing them to acquire customers through price reductions or increased sales promotion.

Now, the profit margin of the Asia vets business at microsoft has rebounded significantly, perhaps due to the boost from AI bringing product competitiveness and pricing power enhancement, thereby bringing positive changes to the profit margin. In the future, we need to continue to monitor whether the profit margin of the Asia vets business at microsoft can maintain a high level.

Of course, the most anticipated aspect is the Office business, which is expected to see a significant increase in average selling price due to the integration of Copilot products. With the increase in Copilot product penetration, microsoft's commercial business led by Office365, the profit margin climbed another step in the first 4 quarters of the 2024 fiscal year, reaching a historical high of over 53%. In the upcoming new performance, we also need to focus on whether microsoft's commercial business can continue to maintain a high level of competitiveness and profit margin.

At this point, you may have some new insights on how to read microsoft's performance. It is worth mentioning that each time a star company releases its performance, it may represent a rare trading opportunity for different types of investors.

For example, if an investor reads the past performance and combines it with the latest developments and feels that a company's latest performance will release some positive signals and be bullish for the short-term stock price, the investor may consider buying the underlying stock or buying call options.

On the other hand, if an investor believes that a company's latest performance will not be optimistic and will put pressure on the short-term stock price, the investor may consider short selling through margin trading or buying put options.

Of course, if an investor finds that the direction of a company's performance is unclear, but the stock price may experience significant fluctuations after the performance announcement, the investor may consider leveraging the volatility of its stock price and implement a straddle strategy by buying both call and put options to seize potential opportunities.

In conclusion,

From Microsoft's successful transformation experience in the past few years, we need to focus on the changes in its three business segment revenues and operating margin when evaluating Microsoft's performance.

Among them, the consumer segment is a money market, but with low market attention. The asia vets cloud business was the growth engine in the past, and now the revenue growth rate has stabilized and rebounded, with operating margin reaching new highs. We need to observe in the upcoming new performance whether Microsoft can maintain the rebound in growth rate and current level of operating margin. With the driving force of the Copilot product, Microsoft's commercial business has undergone significant changes in both revenue growth rate and operating margin, which may also have a significant impact on the stock price.

Each time the company releases its performance, it may bring potential trading opportunities. Investors can consider suitable trading instruments based on their individual risk tolerance.

Risk and disclaimer notice: The above content does not constitute any financial marketing or investment invitation, nor does it constitute any investment advice. Before making any investment decisions, investors should consider the risk factors related to investment products based on their own circumstances and consult professional investment advisors when necessary.