Source: PaxForex Premium Analytics Portal, Fundamental Insight
Microsoft is still one of the most valuable companies in the world, boasting a market cap of approximately $3 trillion. However, its stock’s upward momentum has recently stalled. Over the past six months, the share price has dipped by 3%, and its year-to-date gain of 10% lags behind the S&P 500's 20% rise.
The tech giant has benefited from timely investments in artificial intelligence (AI), integrating new AI capabilities into its products and services. However, while the business itself is performing well, the stock’s premium valuation might be too steep to attract more growth investors at this stage.
So, has Microsoft’s stock hit a peak, or is it gearing up for another rally? According to Wall Street analysts, there could be room for short-term optimism. Their average price target for Microsoft is just under $494, suggesting the stock could rise by around 20% over the next year from its current trading levels.
That said, analysts’ forecasts can vary significantly, and these predictions can shift as more data comes in. If Microsoft’s upcoming quarterly earnings underperform, analysts may downgrade their outlooks and lower their price targets. Conversely, if results surpass expectations, the stock could see upgrades. As a result, the consensus price target is somewhat of a moving target, dependent on the company’s future performance.
For long-term investors, Microsoft remains a solid choice. The company has a well-diversified portfolio, spanning areas like gaming, cloud computing, business software, and networking. This broad base of revenue streams gives it plenty of growth opportunities in the years ahead. However, the stock may be reflecting too much optimism in the near term, especially given its current price-to-earnings (P/E) ratio of 35, which is higher than its five-year average.
There are also concerns about Microsoft’s AI initiatives, particularly around its AI-powered assistant, Copilot, which hasn’t yet generated widespread enthusiasm from customers. How much of a boost AI is contributing to the company’s overall performance should become clearer with the next earnings report.
In the most recent quarter, ending July 30, Microsoft’s revenue climbed 15% year-over-year to $64.7 billion. While this was an improvement over the 8% growth rate reported in the same quarter last year, some investors question whether it’s enough to justify the stock’s current valuation. After all, a P/E multiple of 35 implies high expectations for future growth.
One challenge Microsoft faces is that its significant investments in AI are weighing on profitability. Last quarter, profits rose by just 10% compared to a 20% increase in the prior year. Although revenue growth has accelerated, it hasn’t been matched by similar improvements in net income, which could make some investors hesitant to pay such a high premium for the stock.
If Microsoft’s fiscal 2025 Q1 earnings report, which is due later this month, doesn’t show both strong revenue and profit growth, analysts could become more bearish on the stock. This might lead to downgrades and reductions in price targets, which could weigh on Microsoft’s share price in the weeks and months ahead.
It’s possible that Microsoft has reached a near-term peak. For the stock to move significantly higher, investors would likely need to be willing to pay close to 40 times earnings, and based on the company’s current performance and outlook, that might be a tough sell.
However, for long-term investors looking at a time horizon of five years or more, Microsoft remains a compelling investment. Its strong business model and diverse revenue streams should continue to deliver growth over time. That said, investors should be prepared for potential near-term weakness in the stock. Given its elevated valuation, it wouldn’t be surprising to see a correction in the near future.
As long as the price is above 410.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 415.86
- Take Profit 1: 425.00
- Take Profit 2: 435.00
Alternative scenario:
If the level of 410.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 410.00
- Take Profit 1: 400.00
- Take Profit 2: 390.00
