Source: PaxForex Premium Analytics Portal, Fundamental Insight
Microsoft has been experiencing a remarkable surge in 2023, driven by the resurgence of technology stocks. The company's shares have risen by nearly 40% this year, surpassing the 11% gain of the S&P 500 index. This is a significant turnaround from its performance in 2022 when the stock experienced a decline of nearly 29%.
The success of Microsoft can be attributed to its focus on artificial intelligence (AI) and consistently strong financial results. Additionally, the company has demonstrated resilience during economic downturns by investing heavily in future opportunities. This strategy has bolstered investor confidence in Microsoft's ability to position itself for a prosperous future.
For those who missed out on Microsoft's recent surge, the question arises whether they should buy the stock now in anticipation of further gains or wait due to concerns about the high valuation and sluggish sales in the personal computer (PC) market. To make an informed decision, let's examine the available evidence.
Microsoft's resilience can be attributed in part to its diverse market presence, although a significant portion of its business still relies on the PC market, which has been struggling due to macroeconomic conditions. In the third quarter of fiscal 2023, which concluded on March 31, Microsoft's personal computing segment, typically accounting for about one-third of the company's sales, experienced a 9% year-over-year decline to $13.3 billion. This marked the third consecutive quarter of year-over-year declines for this segment.
However, there are indications that the worst may be over. Canalys, a global technology researcher, believes that the PC market reached its lowest point "at the start of 2023" and anticipates a forthcoming market recovery, potentially beginning as early as this quarter or the next.
Taking a broader perspective, Microsoft's overall results demonstrate the continued strength of its offerings. Revenue increased by 7% year over year and 10% after adjusting for changes in foreign currency translation. The company's bottom line performed even better, with a 10% increase or a 14% increase in constant currency terms.
In addition to the potential recovery in the PC market, there are several other factors that could contribute to driving Microsoft's stock even higher.
One of the most significant opportunities for the company lies in cloud computing, particularly with Microsoft Azure. Microsoft has consistently been gaining market share in the global cloud infrastructure market, although the exact figures may vary from quarter to quarter. According to data from Synergy Research Group, Azure's market share reached 23% by the end of 2022, up from 21% in the same quarter of the previous year. Looking at the longer term, Microsoft's progress in this space is even more impressive, as it has increased its market share by nearly 11 percentage points over the past five years. Microsoft continues to invest in and improve its cloud offerings, indicating the potential for further market share gains in the future.
Another notable development is Microsoft's substantial investment of $13 billion in OpenAI. As part of this collaboration, Microsoft has made advanced AI models like ChatGPT, including "Dall-E 2, GPT-3.5, Codex, and other large language models," available through the Azure OpenAI service. This move enhances the attractiveness of Azure's cloud offerings, potentially accelerating its market share growth.
These catalysts, coupled with Microsoft's ongoing commitment to innovation and investment in future opportunities, suggest that the company has the potential for continued growth and could positively impact its stock performance.
In addition to its collaboration with OpenAI, Microsoft has integrated ChatGPT into its search engine, Bing. Historically, Microsoft has faced challenges in gaining market share against Google, which dominates over 90% of the search market. While it remains uncertain whether the inclusion of AI-driven features will attract long-term search users, the potential benefits are evident. Microsoft's management estimates that even small market share gains in search could represent a $2 billion revenue opportunity. This provides a clear incentive for the company to leverage AI and make progress in this domain.
It's important to note that Microsoft's stock may not appeal to every investing style. Currently, the stock is trading at a relatively high valuation, with a price-to-earnings ratio of 36 and a price-to-sales ratio of 12 based on trailing figures. As a result, value investors might be inclined to pass on the stock. However, considering Microsoft's consistent growth track record, the current valuation appears reasonable. Furthermore, the company is expected to continue increasing its revenue and earnings per share at double-digit rates throughout the remainder of this year and into 2024.
With clear catalysts and a consistent growth trajectory, Microsoft's rebound is likely to accelerate as the economy recovers, potentially happening sooner than expected.
As long as the price is above 312.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 323.34
- Take Profit 1: 340.00
- Take Profit 2: 350.00
Alternative scenario:
If the level of 312.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 312.00
- Take Profit 1: 304.00
- Take Profit 2: 297.00
