Microsoft ‘has pretty good guidance going forward’ compared to other tech stocks: Analyst

Constellation Research Principal Analyst and Founder Ray Wang joins Yahoo Finance Live to examine the takeaways from Microsoft's Q3 earnings report, competition within the mega cap tech space, and the supply chain and production pressures Tesla is facing from the Shanghai lockdown.

Video Transcript

RACHELLE AKUFFO: Welcome back, everyone. We continue our earnings focus with Microsoft with Q3 earnings crossing earlier in the hour, meeting analyst estimates for revenue and earnings per share. The stock has been bouncing up and down in afterhours trading on the news, currently in negative territory. They're down about 1 and 1/3%. Well, here to break down this more is Ray Wang, Constellation Research's principal analyst and founder. Good to see you, Ray. A very busy day, so we're going to start off with Microsoft. What's your reaction on Microsoft's performance? Did it live up to what you thought it would?

RAY WANG: This is an important stock. It's really to show that tech stocks are back. Tech stocks aren't as bad as things were. And they've actually performed. Top line growth, bottom line growth where both there. Azure was growing at 46%, Office 365 growing up at 17%. And what it shows is that while it's decelerating in growth in cloud, it is still doing a good job.

And they've been great at being able to grow not only the cloud revenue, but also an area what they call Intelligent Cloud, which is really the areas around Office, LinkedIn, and Dynamics, which is the big piece, and of course, the Windows franchise. But every unit, almost every unit that has double digit growth. And I think that's what the Street was looking for.

RACHELLE AKUFFO: And you did mention in your notes that it would be that eye on cloud revenues that you were watching. We saw it was up 32% year over year. Why do you think it was able to perform so well?

RAY WANG: Well, a couple of things that are in place, right? The sales motions that are going on with Judson have been very effective. They've been going deep onto industries. And they've been building deeper partnerships with their partners. For example, the Accentures of the world, the TADA Consultings of the world, the Wipros, the Emphasis-- they've been doing a good job, and that's really what's helping them expand into markets, and they've also been building out strong consulting services.

RACHELLE AKUFFO: And of course, you mentioned PCs. There are a lot of people wondering what was going to happen as we sort of come to the tail end of the pandemic, or perhaps just the acceptance of the pandemic, and what that would mean for PC sales. What are you watching in that space?

RAY WANG: Well, you're really looking at Windows sales, and actually, Windows sales were up 11%. And a lot of people weren't expecting that growth. And of course, you're also looking as well at gaming levels and trying to figure out how the gaming sales are doing, especially with Xbox and the big $69 billion acquisition of Activision Blizzard. And so those two things are basically back into the classic business of where Microsoft is. And of course, Xbox content and services is the one that other folks are looking for, as, more importantly, to figure out where double digit growth could be in the future, as we talk about the Metaverse.

RACHELLE AKUFFO: And you mentioned Activision. We did see, as you look at the stock performance, though, tell us about what that signals about the confidence investors have about this deal going through.

RAY WANG: Well, I think there's a lot of confidence about the deal going through. Microsoft hasn't been any of the egregious players that people see as big tech, you know, overreached. They've done a good job with stewardships and ESG in the market. Brad Smith has been out there as their champion, talking about all the good that they can be doing.

And so, other than the issues at Activision Blizzard, which I think Microsoft is intending to resolve and help with a lot of the lawsuits that are going on, people believe that this deal is going to continue. And it's going to continue forward, right? And it's a big part of that future strategy for Microsoft in terms of not just lowering the age of the average user, but more importantly, getting into the Metaverse by pulling together a lot of their gaming assets, a lot of their XRVR assets, and being able to put that into this new marketplace.

RACHELLE AKUFFO: And they are going to have the earnings call coming out later today at about 5:30 PM. What are people going to be looking for in terms of signals as to where Microsoft goes from here, and as you mentioned, trying to compete in the Metaverse?

RAY WANG: A lot of the signals are going to come in. What's happened with the big healthcare acquisition and nuance? What's going on with future revenues? Amy's always done a good job of forecasting out quarters. And Microsoft has a pretty good guidance going forward, unlike some other companies, which have failed to provide guidance. Microsoft has a pretty good handle as to four quarters out, five quarters out, what to expect.

The Street will be listening very carefully because what Microsoft says has a huge impact through the rest of the ecosystem. This is one of the stocks. We've taken away FAANG. We've replaced it with MATANA. As folks know, matana is Hebrew for giving and gift. And so Microsoft, Apple, Tesla, Alphabet, and Nvidia, and Amazon are the six that everyone's looking at in terms of big tech stocks.

RACHELLE AKUFFO: So then, obviously, with this new acronym then-- and we have Google reporting earnings as well-- who are you keeping an eye on in terms of what's really signaling the bellwether for what people can really expect for some of these mega cap tech stocks?

RAY WANG: Well, the importance of Microsoft is because they sit between the business and the consumer side. Google also sits between the business and consumer side. And you've got this three-horse race for cloud revenues between Amazon, Microsoft, and Google. On the other hand, you look at Apple, and that's really a good understanding of what's happening in the consumer space, what's happening in terms of streaming services, what's happening in terms of advertising and privacy laws that are popping up.

That gives you a very different view in terms of what to expect on that consumer side of the equation. And of course, NVIDIA is out there, and Tesla is out there, and these are in different markets, but they all represent huge large cap tech stocks, you know, that people have a lot of interest, a lot of investment in at the moment. And each of these, what we're looking for is growth, right? Is subscriber growth there? Are they growing services revenue? Are they able to retain their customers?

And more importantly, you know, what are they doing? Are they increasing that revenue growth in a strong way by adding new types of services or digital monetization? And if they are, they're doing well. If you're not, you're in the situation where Facebook is, or you're in a situation where Netflix is, where you've got declining subscriber growth. And of course, the Street does not like that because the forecast, going forward, means they're going to be investing in newer areas, or that they invest in the turnaround, and that's killing the stocks.

RACHELLE AKUFFO: And as you mentioned Tesla there, obviously, you can't help but talk about Elon Musk, even though, obviously, a lot of the focus on Twitter. But as we are seeing here with Tesla, we saw the stock was down about 12% during regular trading. It continues to fall. Now it's down about another 1% in extended hours. A lot of people are wondering what's happening here. We did see that officials in India were saying that even though you can manufacture cars here, you cannot import cars that you make in China to India. How do you see all this playing out for Tesla?

RAY WANG: Well, Tesla's got a lot of good things going for it. But right now, what people are worried about is the Shanghai lockdown that will impact numbers in the next quarter. They're worried about how many shares that Elon may have pledged in terms of future shares against the purchase for Twitter, and of course, this controversy in India, where they will not receive anything made in China. And that's going to be a big piece in terms of how components are built and the vertical ice manufacturing.

But on the other hand, each of those gigafactories can produce half a million cars. And if you look at this compared to earnings on GM, I mean, Tesla is running rings around the circle of almost every other auto manufacturer at this moment. In fact, we never value Tesla as an auto stock. We see Tesla as a data play. We see Tesla as a different tech stock out there. We see all the different possibilities from there in terms of Tesla being in a [INAUDIBLE] vehicle and [INAUDIBLE] and kind of service that's going to be out there in the future. So, very, very different things, but I think there's a little bit of egg on Elon at the moment. But I think that's a temporary thing.

RACHELLE AKUFFO: And as you mentioned there, because you do view it differently, it's interesting to see how Tesla does tend to perform versus some of the other automakers. So then, as you look at Tesla and, obviously, some of the pressure it's having from having to shut down the gigafactories as they await the lockdowns in China, where do you see the company positioning itself? And just how far behind are the competitors?

RAY WANG: Well, you have to look at it this way. I mean, by the time the competitors ramp up and get to about 500,000 vehicles or even a million vehicles, you know, Tesla will have been doing that for at least four or five years, right? And then if you look at the charging network and the infrastructure, that's an area that it's been very hard for other competitors to compete in.

And then also, you look at the battery technology. Tesla has a four to five-year lead. And more importantly, they've been able to actually secure chips. They've been able to get batteries out the door. And if you listen in on the GM earnings, you'll see that it's going to cost about $6,000, the battery, to be able to get this up there, and the batteries are rising costs, right? Tesla's vertically integrated. They make their own batteries. And that's going to be the difference going forward for companies that are building EVs. You've got to be able to have your battery supply locked down.

RACHELLE AKUFFO: Indeed, always great to get your take. Ray Wang there, Constellation Research's principal analyst and founder, good to see you.