Oct 23, 2023

Microsoft shares have dipped with the broader market but could get a boost from Tuesday’s Q1 earnings.


MSFT: Weekly Chart

MSFT shares have still struggled since hitting a top near $350 and now trade at $326. Continued weakness in the stock indices is a threat, but the downside has been limited, and earnings could spur a further advance.

Citi analyst Tyler Radke sees the company accelerating total revenue and profitability due to stronger IT budget trends and new generative AI revenue streams. Radke said eyes will be on the company’s Azure cloud growth and the new AI tool Copilot, where strong early adoption trends are tipped.

Radke also updated his estimates for Activision with signs of stabilisation in cloud spending, which are offset by some small FX headwinds.

The analyst predicts year-on-year growth of 26% for Azure, which is a high bar and could hurt Microsoft.

Investors are also considering the impact of the recent $1 billion deal with cloud computing giant Amazon. Amazon is said to be deploying Microsoft 365 tools across its workforce, and Amazon will pay $1 billion over five years to Microsoft for the licences.

One of the key indicators for the stock will be the Copilot AI assistant tools, which were priced at $30 per month. Google has since launched a rival product with the same price tag for its own productivity tools, so the two companies will battle it out for dominance in the new sector.

KeyBanc analyst Michael Turits keeps an overweight rating on Microsoft with a price target of $400. The analyst increased his outlook ahead of Q1 earnings following stable results in Q3 and better feedback on Azure from a few large channels, including the AI contribution to Azure growth.

Some analysts fear that Microsoft is still valued at a premium to its tech peers, and if the company does not show strong AI progress, then there could be some downside to the stock price that could hurt other AI stocks.

The Nasdaq tech index closed around the September lows and could see a bounce early in the week. With strong earnings from Microsoft, the shares could head for the $350 highs, but weaker-than-expected AI would be a negative.

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