Microsoft: cloud margins are the number to watch
Microsoft's cloud growth is well known. What is less discussed is that cloud gross margin has been drifting lower as the company builds capacity ahead of demand. My view: that is temporary, and the stock rerates when the trend turns.
Sample research report used to test the layout. Delete before launch.
Thesis
Capacity built ahead of demand depresses margins now and expands them later. The company has said as much, the market has half-believed it, and the stock has gone sideways for most of the year as a result. I think the margin trend turns within two quarters, and the stock follows.
Catalysts
- Cloud gross margin printing flat or up for the first time in a year.
- Commentary on capacity utilization on the next call.
- A slower capex guide, which would be read as demand catching up with supply.
Risks
- Capex keeps rising and margins keep falling: the build-out is bigger than the demand.
- Pricing pressure from competitors with similar capacity.
What would prove me wrong
Two more quarters of falling cloud margin with rising capex. That would mean the company is buying growth, not investing ahead of it.
Position
Long, at a full position. This is a patient one; the chart is not exciting, and it does not need to be.