Source: PaxForex Premium Analytics Portal, Fundamental Insight
Ahead of Microsoft's fiscal Q3 earnings report, investors have a lot of questions. The company's latest report showed that the slowdown in demand is spreading to several key niches, including cloud services.
However, in late January, company executives made an optimistic statement about Microsoft's long-term potential in areas such as cybersecurity, video games, productivity software, and artificial intelligence (AI).
Let's take a closer look at Wall Street's expectations for the company's April 25 report and what that statement could mean for Microsoft's stock returns this year.
Most Wall Street analysts expect sales to increase only 3% in Q3, which ended March 31. That result would be an improvement over the 2% gain in the previous quarter, but the big question is whether demand trends continue to deteriorate.
During a conference call in January, company executives said the weakening demand extends to previously fast-growing areas such as commercial software, the Azure platform, and the US market as a whole.
"We're seeing customers being cautious in this environment, and we're seeing weakening results in December," Chief Financial Officer Amy Hood told investors. We'll soon find out how much these negative trends have worsened in the calendar year 2023."
Microsoft's share price performance will also depend on how well management can balance profitability with investment in growth initiatives. Even in the cyclical downturn that has already begun in such niches as PC software, the company is looking to continue gaining market share by cutting costs and improving efficiency.
Look for progress in metrics such as operating profit margin. That metric declined at the end of 2022 but remained high compared to before the pandemic. At the end of December, Microsoft had $22 billion in adjusted operating profit, which means a margin of more than 40 percent on sales. Cost reductions should help keep this industry-leading figure in 2023.
Also worth noting is the solid cash flow that helps fund direct shareholder returns through dividends and share repurchases. Last quarter, Microsoft spent $9.7 billion for this purpose.
On the eve of the report's release, most investors expect sales momentum to continue to accelerate moderately in 2023, largely due to easing currency pressures. Profits are projected to grow slightly faster than sales, thanks to Microsoft's strong cost-cutting efforts.
The stock's short-term movement will depend on whether management's outlook for the fiscal Q4 is consistent with this broader investment thesis. If Microsoft sees even more caution from customers, especially in commercial and cloud services, the stock could easily regain some of the market gains that shareholders have seen since the beginning of the year.
However, the company's medium-term growth prospects look bright, even if the next few quarters see choppy results in major markets. In addition, Microsoft remains highly profitable and has plenty of cash on hand. These factors suggest that the company's stock could continue to outperform the market over the next year.
Risk-averse investors may want to wait for more clarity after the earnings report is released. But it looks like Microsoft is poised for another year of steady market share gains in several attractive technology niches this year.
As long as the price is above 275.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 285.93
- Take Profit 1: 292.00
- Take Profit 2: 300.00
Alternative scenario:
If the level of 275.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 275.00
- Take Profit 1: 269.00
- Take Profit 2: 262.00
