Microsoft shows the way.
The story went like this:
Wall Street gained on Wednesday and the S&P 500 and Dow industrials set fresh records, as Microsoft’s strong results boosted the indexes and marked the latest sign that U.S. corporate earnings season may be less dour than feared.
Microsoft shares surged 5.3% after the software giant posted sharp growth in its cloud computing business. The stock gave by far the biggest lift to the major indexes and the tech sector.
That’s how Reuters summarized the action on Wednesday afternoon to explain why the S&P 500 rose 0.4% to another record high, the NASDAQ 1.1%, and the Dow 0.2%. Many stories about this propitious event had a similar twist.
Microsoft, one of the aging tech elephants out there big enough to move the needle, had beaten analysts’ estimates, and markets were ecstatic.
Tuesday evening, CNBC raved that Microsoft reported quarterly earnings and revenue “that easily topped analysts’ expectations, as its key cloud product, Azure, saw revenue grow 102%.”
On Yahoo Finance, we read, “Microsoft crushes on earnings and revenue, stock pops.” And there’s some detail about the part that performed miracles in the quarter:
Earnings of $0.69 per share on an adjusted basis” – here we go again, adjusted, the mark of great American fiction – “up from $0.60 a year ago. Analysts were expecting $0.58.
Revenue of $22.6 billion, up from $22.18 billion a year ago. Analysts were expecting $22.14 billion.
Alas, that revenue figure ($22.6 billion) is factually wrong. Honest typo? We’ve certainly made plenty of them in the heat of the battle. But then the math of revenue growth is wrong too. The total revenue Microsoft actually reported under GAAP is $20.6 billion.
By going to the Microsoft press release, we find out that Yahoo cited a non-GAAP measure Microsoft had offered as a supplement, but Yahoo failed to disclose that it was non-GAAP. That smells of reader deception. The Yahoo report fabricated revenue growth out of a revenue decline. The GAAP figure Microsoft reported was a drop of 7.1%.
And worse, cost of revenue rose 6.8%.
So gross margin plunged 14.1% from $14.7 billion to $12.6 billion.
There were also impairment charges of $1.1 billion, but that was down from $8.4 billion a year ago. This is Microsoft’s way of confessing to the magnitude of the madness of its disastrous acquisition of Nokia [read… After Losing $11 Billion on $9.4-Billion Nokia Buy & Axing 27,650 Jobs, Microsoft Dumps Consumer Smartphones
Operating income without those write-offs plunged 34%, from $6.38 billion to $4.19 billion.
For fiscal 2016, revenues dropped 8.8% year-over-year. Gross margin fell 13.2%. And without the write-offs, operating income plummeted 24% from $28.2 billion to $21.3 billion.
In both years combined, Microsoft’s write-offs totaled $11.1 billion. Not exactly petty cash.
In fiscal 2014, net income was $22.1 billion. In fiscal 2015, net income plummeted by 45% to $12.2 billion. Thanks to lower write-offs in fiscal 2016 (ended June 30), net income was $16.8 billion. That’s down 24% from two years ago!!
So what kind of tech-dud is this? Well, according to its P/E ratio, it is one HOT dude, with a sky-high P/E ratio of 43. In saner times, a P/E ratio this high is reserved for demigod-like companies that can double revenues and earnings at the flick of a wrist.
But Microsoft is going downhill. It’s suffering from a top-line revenue decline. It has botched its entry into mobile and spent a fortune doing so. Its flagship PC business is withering. It is not able to make up for these holes with its cloud business, though it’s holding out the hope that it can. Falling revenues meet rising costs….
So in anticipation of declining sales, shrinking margins, and blistering write-offs, the market might have pushed down MSFT for the past year or so, beating it down at every new revelation of a lowered outlook and other mishaps. And then, when results are “better than feared,” there would be a reason for a little perk.
But that’s not what happened. Despite lowering expectations and predicting crappy results and huge write-offs, Microsoft and Wall Street have managed to push up the stock into the range of $50 to $55 a share late last year and so far this year, with that entire range being a multiyear high not seen since the dotcom bubble.
Instead of punishing the shares of a company with declining sales and profits, huge write-offs, and a sky-high P/E ratio, markets simply continue to drive the stock higher, no matter what. Other stocks experience the same thing.
Microsoft isn’t the only company with these sorts of results. In aggregate, the companies in the S&P 500 are in their sixth quarter in a row of revenue declines. And aggregate earnings, based on “adjusted” ex-bad items earnings that companies have already reported so far this quarter or are expected to report are down 5.5% year-over-year, the fourth quarter in a row of declines. Under GAAP, earnings are even lousier.
Yet this market continues to rise, and it does so on low volume, as worldwide central-bank created liquidity is searching for a place to go, and as investors are hoping that central banks determine stock prices and will continue to inflate them, regardless of what these companies report. And so they chase after them, even after Microsoft with its dizzying share price, while earnings season, more than ever, is turning into the Theater of the Absurd.
But many companies are struggling with their debt, and quietly, the noose tightens one by one. Read… US Credit Conditions Drop to Worst Level since Q3 2009, Markets Soar