Windows fell 12%, PC hardware couldn’t be sold, and Microsoft’s market value still exceeded 18 trillion thanks to Open AI

Text: Zinc Finance, Author: Sun Pengyue, Editor: Dafeng

Recently, Microsoft released its fourth fiscal quarter (Q2 2023) and full-year financial reports. This so-called Microsoft's "most important financial report in history" sounded the clarion call for Microsoft to hit the "three trillion dollar club".

In the fourth fiscal quarter, Microsoft achieved total revenue of US$56.2 billion, an increase of 8% year-on-year, higher than market expectations of US$55.49 billion, and net profit of US$20.1 billion, an increase of 20% year-on-year.

Fourth fiscal quarter (2023 Q2 quarter)

In the full year of 2023, Microsoft achieved total revenue of US$211.9 billion, a year-on-year increase of 7%, and net profit of US$72.4 billion, a year-on-year decrease of 0.5%.

2022 full year financial report

In Microsoft's two financial reports, the most eye-catching star project is naturally AI. As the major shareholder of OpenAI, Microsoft has swept away the decline in the PC market for many years, and once again returned to the center of the stage of the world's technology companies.

With AI in hand, challenge Apple

Based on the advanced layout of AI, Microsoft began to invest in OpenAI in 2019. According to the statistics of Yiou TE Think Tank, Microsoft has invested about 13 billion US dollars in OpenAI since 2019.

With the popularity of ChatGPT, since the beginning of this year, Microsoft's stock price has risen by 44.39%, reaching an all-time high of $360.

Microsoft successfully ignited the boom in AI large-scale models around the world, and the market value has also risen accordingly. ** After the release of the financial report, Microsoft's market value has reached 2.61 trillion U.S. dollars (about 18.7 trillion yuan), while Apple, the company with the highest market value in the world, has a market value of 3.05 trillion U.S. dollars (about 21.8 trillion yuan). **

Morgan Stanley estimates that, based on the minimum penetration rate, the AI business can bring Microsoft an incremental opportunity of up to $90 billion by fiscal year 2025.

At the same time, OpenAI is also driving breakthroughs in other Microsoft businesses, such as Azure cloud services.

After Microsoft invested in OpenAI, it migrated cloud services from Google Cloud to Microsoft Azure, saving up to $70 million in model training costs per year. And in March 2023, Microsoft launched the Azure OpenAI service to provide SLA-guaranteed enterprise-level services to help enterprise customers fully explore the huge potential of combining AI with business scenarios.

Microsoft highlighted the performance of the Azure OpenAI project in its earnings call. According to CEO Nadella, Azure OpenAI accounted for more than 50% of the $110 billion in cloud sales in fiscal year 2023 for the first time.

In the fourth fiscal quarter, Azure OpenAI had nearly 100 new customers every day, including Volvo Group, Zurich Insurance, Moodys (one of the three major credit rating agencies in the United States), Mercedes-Benz, Shell and other top customers.

** Not only Azure OpenAI cloud service, but around the field of AI, Microsoft has upgraded most of its products. **The first is the Office family bucket. Since March 17, Microsoft has embedded Microsoft 365 into GPT-4 and launched Microsoft 365 Copilot, which has become the world's first artificial intelligence large language model (LLM) tool.

Users can use Microsoft 365 Copilot natural language text prompts to generate Office content, such as entering simple command characters, and automatically generating PowerPoint presentations based on Word documents to save a lot of working time.

Bing Search is also undergoing an AI upgrade. In February this year, Microsoft added Bing Search to the ChatGPT capability. Not only can you use GPT-4 visual search, but it also remains free; in July, it continued to launch the Bing Chat Enterprise Edition to improve Productivity and handling of sensitive business data.

According to Microsoft, Bing Chat provides services to more than 160 million people around the world, and once changed the pattern of global search engines.

** It can be said that Microsoft's overall market has continued to rise driven by AI, and has embarked on a new path. **Microsoft said in the financial report meeting that it has seen strong demand for AI. In order to support the growth of Microsoft Cloud and the demand for artificial intelligence platforms, it will continue to accelerate investment in cloud infrastructure.

Microsoft will continue to increase investment in AI, even at large sums of money. In its fourth-quarter financial report, Microsoft spent as much as $8.9 billion, a 32% increase from the same period last year, mainly to support cloud demand, including investment in artificial intelligence infrastructure.

PC and gaming business is still a worry

Although Microsoft relies on AI, its market value has been soaring all the way, and it may even exceed 3 trillion US dollars, but there are still uncertainties in the PC business and game business.

Microsoft's personal computer PC business continued to slump, with fourth-quarter revenue falling 4% year-over-year to $13.9 billion. Among them, the revenue of Windows operating system and hardware equipment dropped significantly, down 12% and 20% year-on-year respectively.

The continuous decline of the PC market is inseparable from the overall downturn in the global market. According to data disclosed by Gartner, global PC shipments totaled 59.7 million units in the second quarter of 2023, a decrease of 16.6% from the same period in 2022.

** This is the seventh consecutive quarter of year-on-year decline in the PC global market. Prior to this, the global PC market shipments have fallen by more than 30% year-on-year for two consecutive quarters. **

Overall, one of the key risks to Microsoft's PC business is declining demand for its products and services. During an economic downturn, consumers may have less disposable income, leading to lower spending on discretionary goods and services such as technology products. New hardware needs to be launched to enhance product strength. At the same time, Microsoft is also expanding its hardware cooperation circle to increase revenue from the PC business.

At the Microsoft Ignite 2022 technology conference in October last year, CEO Satya Nadella announced at the conference that Cisco has become a device partner of Microsoft Teams, and Microsoft Tearm will soon be set as the default function of Cisco conference hardware.

Microsoft has previously partnered with POLY, a hardware and services company that provides headsets, webcams, speakers, and desk phones for all workspaces.

**In addition to the obstacles in the personal computing business, the game business is also a difficulty for Microsoft. **

According to the fourth fiscal quarter, Microsoft's game revenue increased by 36 million US dollars year-on-year, an increase of only 1%. Among them, Xbox content and service revenue increased by 5%; but Xbox hardware revenue fell by 13%, and fell by 30% month-on-month.

In 2022, the Xbox gaming business will generate $16.22 billion in revenue, but the cumulative revenue will regress to $15.477 billion.

Although the revenue of Microsoft's game business failed to meet expectations, the game time of Xbox Game Pass increased by nearly 25% compared with last year, and the number of monthly active users also hit a record high, but Microsoft did not announce the revenue and subscribers of the Game Pass business. scale.

At the same time, Microsoft officially acquired Activision Blizzard with US$67.8 billion in cash on January 18, 2022. However, this largest game merger and acquisition in history has not yet been successful. Instead, it has been subject to antitrust reviews by the United States, the United Kingdom, and the European Union. .

**Microsoft originally planned to complete the acquisition of Activision Blizzard in fiscal year 2023, but the company stated in its financial report that the acquisition agreement for the acquisition of Activision Blizzard will be postponed to October. Currently, the acquisition is still stuck in the UK review agencies and the US Federal Trade Commission. **

The finale has not been seen for nearly two years, which makes people particularly optimistic about Microsoft's game business.

Dachang Siege AI

On the day Microsoft released its financial report, Alphabet, the parent company of Google, the old rival, also released its Q2 quarterly financial report for 2023.

Google’s Q2 revenue was US$74.604 billion, a year-on-year increase of 7% (the last quarter’s data was an increase of 3%); operating profit was 21.838 billion US dollars, and the operating profit margin was 29% (the last quarter’s data was 25%), a year-on-year increase of nearly 12.3%, and the net profit was 184 100 million US dollars (15.1 billion US dollars in the previous quarter). Diluted EPS was $1.44, up 19% year-over-year.

Alphabet immediately held a conference call to celebrate its outstanding performance while emphasizing that Google will make a big move into the AI field in the future. Announced that the latest operating system Android 14 will incorporate AI tools, and said that it will readjust the team's focus and accelerate towards the AI field.

At present, Google has focused its AI project on its smart assistant Google Assistant, which is expected to undergo a generative AI transformation.

According to Google’s internal email disclosure, Google will use the latest generative AI technologies such as ChatGPT and Bard to empower Google Assistant. At the same time, in order to carry out research and development work more quickly and focus, Google said that it will conduct internal reorganization, dozens of positions will be laid off, and all affected employees will have a buffer period of at least 60 days.

**Google is not the only top Internet player who cares about the AI model, and Meta, which suspended the Metaverse, is also one of them. **

Last month, Meta announced the deepening of cooperation with Microsoft, officially launched a new generation of open source large-scale language model Llama 2, and made the model free for commercial and research use. Facing the technical fence that OpenAI and Google are working hard to build, Meta held high the banner of free, trying to achieve corner overtaking through ecological opening.

As the first open source and commercially available large language model, Llama 2 is undoubtedly a blockbuster, and it is likely to change the competitive landscape of the large model industry.

Whether it is Google or Meta, as the top Internet companies, their research and development capabilities are beyond doubt. Although OpenAI is the overlord of AI large models, it still needs to be cautious in facing their challenges.

Once there are performance gaps or system vulnerabilities in ChatGPT, a large number of developers and entrepreneurs will abandon ChatGPT and turn to Google Assistant and Llama 2.

There was Google before, and there was Meta later. Microsoft's path to promotion to the "three trillion club" is still full of difficulties.