Microsoft Build 2022 – Metaverse placeholder

Microsoft goes back to basics.

• Microsoft is taking its developer conference back to its roots and focusing its time on things that actually matter to developers rather than using it as a platform to launch new products and features.
• However, it was very quiet on the Metaverse which will only lead to further speculation that its Metaverse effort is in disarray despite its seemingly strong position.
• Microsoft is holding its annual developer conference where the entire focus is now on software development using Microsoft’s tools and platforms.
• The days of glitzy Surface announcements and Joe Belfiore shooting aliens hiding behind sofas in AR are long gone and have been replaced with screenshots of code and videos of developers discussing the apps and services that they have created.
• The only device that was announced was Project Volterra which is an Arm-based Windows mini-PC that uses Qualcomm Snapdragon and is aimed solely at app development using Visual Studio.
• This tells me that Qualcomm and Microsoft have yet to come up with a true competitor for the M-series of chips from Apple, but they are obviously working furiously on it.
• This is what the Nuvia acquisition (see here) was all about and with Qualcomm’s increased silicon release cadence, I suspect that we might see something announced within 12 months or so.
• That would mean devices in the hands of consumers sometime in 2024 by which time Windows on Arm might finally be able to compete head-to-head with Intel and AMD.
• However, of the Metaverse, there was almost no sign.
• CEO Satya Nadella’s keynote tacked on the Metaverse at the end but in reality, he had very little to say beyond that which has already been said.
• There were no announcements and his commentary felt very much like a placeholder to remind everyone that Microsoft has a place in the Metaverse even if the company is not sure what that place is.
• Microsoft has a series of assets spread across the consumer and enterprise that could form the springboard for a leading Metaverse play but the situation remains very unclear.
• For instance, it appears that Microsoft has cancelled HoloLens 3 but at the same time is spending billions to acquire Activision which combined with Xbox and Minecraft has the potential for a potent consumer Metaverse effort.
• Furthermore, at Build 2022, there is only one (out of more than 300) session on the Metaverse which is a panel of Microsoft execs sharing their perspectives on the Metaverse and its benefit to the enterprise (i.e., another placeholder).
• Hence, I think Microsoft’s Metaverse strategy is currently on the workbench disassembled in pieces with its executives standing around it scratching their heads wondering what to do next.
• This is not necessarily a problem because RFM Research has concluded that the Metaverse is years away, but it is not a good look for the company.
• I think that it is important that Microsoft gets its Metaverse strategy right rather than rush out with something half-baked and I suspect that partnerships with Samsung and maybe Meta Platforms may be a big part of what it eventually comes up with.
• Microsoft continues to fire on all cylinders with excellent financial performance despite the challenging macro environment.
• Hence, I think that Microsoft will prove to be more defensive than much of the rest of the technology sector, a lot of which took a big hit from Snap’s sudden profit warning yesterday while Microsoft remained virtually flat on the day.
• Microsoft is a bit cheaper than it was at calendar 2022 PER of 26.3x but it is very far from what I would call a value play within the technology sector.
• Hence, I still prefer the high quality but value end of the semiconductor sector like Qualcomm, MediaTek and TSMC all of whom are growing well but trading on around 14x 12-month forward PER.
• Microsoft will be relatively defensive against much of the sector and so one could consider it from that perspective, but I see risk in its multiple unwinding further if the broader sell-off continues.
• I think I will stick with semiconductors with value for at least the next quarter or so.