Nasdaq 100 outlook: Where next for Microsoft stock ahead of earnings?

Key takeaways

• Microsoft has proven resilient during a tumultuous couple of years, having reliably grown sales and earnings
• Earnings to grow at fastest pace in 18 months thanks to easier comps and cost cutting
• Hardware sales remain challenging as cloud computing and software sales suffer from growth slowdown
• Microsoft carving-out early lead in AI through ChatGPT workloads and imminent launch of new commercial AI tools
• Confidence has never been higher that Microsoft will get all-clear from regulators to buy Activision Blizzard
• Microsoft valuation will be tested this season, but has the potential to outperform its rivals

Microsoft Q4 earnings date and time

Microsoft is scheduled to release fourth quarter and full year results after US markets close on July 25. A conference call will be held on the same day at 1430 PT.

Microsoft stock: Q4 earnings consensus

Wall Street forecasts Microsoft will report a 7% year-on-year rise in revenue in the fourth quarter to $55.5 billion and adjusted EPS is expected to rise 14.5% to $2.55.

If it performed as anticipated in the period, then Microsoft is on course to report a 6.5% increase in annual revenue to $211.2 billion and a 4.3% rise in full year EPS to $9.61.

Microsoft stock: Q4 earnings preview

Microsoft has the potential to be the standout performer this earnings season thanks to its diversified business model and leadership in artificial intelligence. 

Revenue is forecast to be up 6.9% at $55.5 billion. Hardware remains under pressure and sales are expected to be down another 6% this quarter. Consumers continue to buy fewer devices after splurging during the pandemic and because of the increasingly challenging economic landscape. That is also knocking demand for its Windows operating system.  One bright note could be in gaming, where sales are forecast to grow for the first time in six months with analysts forecasting a 7.8% year-on-year rise.

Falling hardware sales will be countered by healthy demand for its array of software, particularly its Office suite of products, and its cloud computing services. Both of these are vital to day-to-day operations for many, but they growth has slowed as businesses trim their budgets and consumers tighten their belts. The brakes are also being applied to LinkedIn as the jobs market cools.

Intelligent Cloud sales are expected to be up 14.4% from last year to $23.8 billion, but that would mark the slowest growth since 2017! Azure, which is always closely-watched, is seen delivering 27% growth at constant currency.

Microsoft has reliably grown earnings over what has been a tumultuous few years for most and adjusted EPS is forecast to rise 14.5% to $2.55 this quarter, marking the fastest growth in over 18 months. This will be the first time costs are expected to rise at a slower rate than revenue in over a year as inflationary pressures ease and its cost-cutting efforts pay off. EPS growth will be flattered as it starts to come up easier comparatives, which should also help results as we enter the new financial year.

Commentary on what to expect over the coming 12 months will be influential on how the share price reacts. Wall Street believes earnings growth will accelerate to almost 15% as a faster rise in sales of 11.8% counters slightly smaller margins, with analysts pencilling-in an adjusted gross margin of 68.6% and an operating margin of 42.3%.

AI stocks: Microsoft

Microsoft has the greatest potential to impress with its advancements in artificial intelligence this earnings season as rivals try to find their feet in this nascent and fast-moving industry.

Microsoft’s AI ambitions are underpinned by its relationship with OpenAI, the company behind ChatGPT. It it already running generative AI workloads from ChatGPT on its cloud computing network, giving it a possible lead over rival Amazon Web Services. CEO Satya Nadella told investors in the last quarter that Microsoft Cloud was the ‘platform of choice’ for companies leaning into AI.

Meanwhile, it is also infusing its products with new AI and preparing to unleash new commercial tools that could provide major new revenue streams. The fact Microsoft recently outlined its pricing plans for its new suite of AI products, named Microsoft 365 Copilot, shows it is ready to monetise. Microsoft said it will charge $30 per month, per user for corporate customers. That also gives it the opportunity to set the bar in terms of both price and quality, given most of its Big Tech rivals are behind. Analysts are bullish on the prospects in the belief that the price tag can be justified by the productivity gains offered.

AI certainly helped send Microsoft shares to new all-time highs earlier this month but it has not led to the inflated valuations we have seen in some other tech stocks despite the fact Microsoft appears to have carved out an early lead. Microsoft’s forward price-to-earnings ratio of 28.6x is only a 4% premium to its five-year historical average and that is actually at a discount to the Nasdaq 100! That shows investors have not yet assigned much value to its AI prospects, which may make it easier to impress on this front.

Microsoft and Activision Blizzard merger

The regulatory hurdles facing Microsoft’s $69 billion acquisition of video game maker Activision Blizzard, known for making the popular Call of Duty shooter, have fallen away in recent weeks, although it is not yet a done deal. The original deadline to complete the deal was missed and the pair recently extended it until October 18.

Currently, only UK regulators stand in the way of completion. The Competition & Markets Authority originally blocked the deal back in April but have reopened the case and said it is aiming to make a ruling in the week starting August 7. That came after European regulators gave the all clear and the US Federal Trade Commission, which is trying to scupper the deal, failed to convince the courts that the deal would significantly harm competition. The FTC is, however, appealing that decision…

There is still a risk the deal is blocked but markets are more confident than ever that it can get over the line. Activision Blizzard shares hit over $93 just a week ago, the closest they have got to Microsoft’s $95 per share offer since the deal was first announced at the start of 2022 - although we have seen the share price slide back below $92 since then.

Where next for MSFT stock?

There is early evidence that this earnings seasons will test the higher valuations earned in the first seven months of 2023. The likes of Tesla and Netflix have shown that it is not taking a lot to disappoint and suggests the bar is quite high to impress. However, Microsoft’s more sensible valuation, growth and earnings resilience, twinned with its AI prospects, suggests it is a contender to outperform this season.

Microsoft shares have pulled back since hitting fresh all-time highs last week. The stock slipped below the record high of $344.62 on Friday but is looking to open back above this level in premarket trade today. The stock can climb back toward the upper-end of the parallel channel if it can find some new momentum and get back on the path to hit new all-time highs.

Any disappointment could see it test the bottom-end of the channel, with the 50-day moving average lingering to provide a potential safety net.

Nasdaq 100 analysis: Where next?

Microsoft is the second-largest individual component of the Nasdaq 100 and carries a 9.8% weighting, meaning its performance has a significant impact on how the broader index fares.

The index pulled back last week as we got the first earnings out from the tech sector. We saw 15,425 hold as a floor on both Thursday and Friday as it hovers above the middle of the parallel range. We could see it slip back toward the 78.6% retracement at 15,300 if it remains under pressure. Any severe drop risks seeing it fall back into the bottom-half of the channel, which is currently lining-up with the 50-day moving average.

On the upside, the Nasdaq 100 needs to close back above the recent-high of 15,888 before eyeing a move above the psychological level of 16,000.

Take advantage of extended hours trading

Microsoft will release earnings after markets close and most traders must wait until they reopen the before being able to trade. But by then, the news has already been digested and the instant reaction in share price has happened in after-hours trading. To react immediately, traders should take their positions in pre-and post-market sessions.

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