Market confidence in Microsoft’s AI potential drives optimism despite earnings volatility and modest guidance.
- Microsoft is poised to emerge as a major player in AI alongside Nvidia, with a 46% stock price increase in the past year.
- Despite recent fluctuations, the market anticipates strong performance in upcoming quarters, reflected in a rich P/E NTM of 33x.
- The market anticipates strong revenue growth but remains cautious due to QoQ declines; AI monetization and sustained growth are crucial focus areas for investors.
- Catch the latest investment trends! Join our FREE Wall Street Trends Substack community for insights and stay tuned for the newest investment insights.
While Nvidia (NVDA) has garnered much of the AI spotlight, the market is already anticipating that another major winner in this trend will be Microsoft (MSFT). Over the past 12 months, Microsoft stock have amassed a 45% gain.
Ahead of its earnings on April 25, the stock is wavering and delivering returns below the index, showing a 3.6% retracement in the last month and 2.4% over the last 5 days. Still, there are (relatively) high expectations for the company not only in this quarter but also in the upcoming periods, as indicated by MSFT’s rich NTM P/E of 33x.
Market Expectations vs. Guidance
In the last quarter (Q2 FY24), Microsoft reported robust results, with consolidated revenue growth of 18%, as well as an expansion in its margins. However, the results were deemed “mixed” by the market, as the guidance didn’t quite please.
The guidance provided for Q3 FY was for revenues of $60.5 billion (middle of the range), representing a decline compared to Q2 FY. Market estimates have already adjusted to reflect this expectation, albeit slightly above the ‘middle of the range’ at $60.9 billion.
Such an estimate implies 15% YoY growth projected for the quarters of 2024, except for the last one, where the expectation is for more ‘timid’ growth of 13%.
Expectations for margins, while still rich, do not point at meaningful expansion. Worth pointing out are gross margins that the market expects to improve slightly QoQ. Adjusted EBITDA margin is forecasted at 52.1%, down QoQ but up YoY. For adjusted EPS, the number to beat is $2.84, a 16% YoY increase and 3% dip sequentially.
Could Microsoft Stock Soar After Earnings?
As seen above, the market largely projects status quo in the quarter, with revenue and EPS growing YoY. Delivering these numbers are entirely plausible for Microsoft, given how the Street has aligned with what I consider conservative guidance that suggests declines QoQ.
This leaves room for Microsoft to surprise yet again and may help the stock to maintain its upward trajectory, despite an already rich P/E.
On the other hand, it’s worth noting that earnings surprises do not guarantee that the stock will rise. In the last four quarters, Microsoft beat consensus in all of them (see chart below), but the stock only advanced on the same day in two of those days. This is because other factors such as guidance and the read-through on AI and cloud also significantly impact market sentiment.
The Verdict on MSFT Stock
On TipRanks, out of 34 ratings on Microsoft Stock, 32 are buy, 1 hold, and 1 sell, with the average price target being $477, i.e., an upside of 17%. An example of a bull is J. Derrick Wood from TD Cowen who, despite a modest price target of $455 that is below consensus, expects a good Q3 for the company, with Azure growth beating street and riding AI tailwinds.
Thus, even with relatively stretched valuation, the assumptions priced into Microsoft stock may be de-risked. Should Microsoft deliver a beat and raise, the stock could benefit from renewed momentum.
That said, keep an eye on AI monetization and growth, as well as cloud momentum – particularly during the earnings call discussions.
Catch the latest investment trends! Join our FREE Wall Street Trends Substack community for insights and stay tuned for the newest investment insights.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content)
Leave a Reply