Microsoft released their earnings report yesterday. Although its fundamentals remained stable, the stock continued to sell-off as much as 4% in the post-market.
So, why is Microsoft experiencing a sell down?
Let’s take a look at their latest earnings and key indicators in its price charts that you should pay attention to, if you’re looking for a buying opportunity.
Microsoft’s Earnings in a Nutshell
Briefly, here are the key results from Microsoft’s earnings report:
- Earnings: $2.69 per share, vs. $2.55 per share as expected by Refinitiv. [Beat]
- Revenue: $56.19 billion, vs. $55.47 billion as expected by Refinitiv. [Beat]
- Guidance: approx. $54.30 billion vs $54.94 billion consensus among analysts polled by Refinitiv. [Miss]
Overall, their fundamentals remain sound.
Despite macroeconomic conditions, they were still able to achieve an almost 20% increase in net income YoY. This can be attributed to declining labor costs (due to the layoffs) along with declining R&D costs.
Hence the question now remains: why the sell-off? !
I attribute this to the 2 red-flags that shook investors:
????Spending on AI : Patience is required
Wall Street is known to be a little short-sighted when it comes to earnings as investors want to see how a company is performing in the near-term. Investor’s don’t want fancy plans for the future, they want to know how a company is performing quarter on quarter.
To this end, the biggest ‘problem’ for Microsoft this quarter is really to do with their capital expenditure on AI. While Wall Street wants AI revenues to come in now, that sense of excitement seems to dissipate when companies turn around to say that they first need to spend on the infrastructure.
Microsoft’s AI revenue impacts will thus be weighted toward the second half of the new fiscal year that just began, she continued. Meanwhile, she expects that Microsoft’s capital expenditures will rise sequentially each quarter “as we scale to meet demand signals.”
Microsoft earnings top estimates, but stock falls as execs detail AI’s costs
With regard to when any expenditure on AI may eventually pay off, the current guidance given is that “the company should see the impact of higher revenue in the second half of the 2024 fiscal year rather than the first half”.
In the near term, Microsoft is looking to integrate AI into their productivity applications via a program known as Copilot Assistant. While this has not yet been launched, Microsoft is looking to charge users $30 a month for this service as an add-on to existing subscriptions.
Do note that even with this initiative, management has cited that revenue from it may be “gradual” as the infrastructure needs to scale accordingly with demand.
“Even with strong demand and a leadership position, growth from our AI services will be gradual as Azure AI scales and our Copilots reach general availability dates,”
Microsoft shares dip after quarterly revenue guidance misses expectations
????No one likes pessimistic guidance
On a conference call with analysts, Amy Hood, Microsoft’s finance chief, called for $53.8 billion to $54.8 billion in fiscal first-quarter revenue. The middle of that range, at $54.30 billion, implies 8% growth, and falls short of the $54.94 billion consensus among analysts polled by Refinitiv.
Microsoft shares dip after quarterly revenue guidance misses expectations
Microsoft called for lower guidance which at $54.8 billion, would certainly be less than what they were able to achieve in Q4. While this certainly isn’t a deal breaker in any way, this wasn’t what Wallstreet expected. High expectations were set on Microsoft given that they have the first-mover advantage in AI.
The rapid growth and success of AI have undoubtedly contributed to the heightened expectations surrounding Microsoft. As a leader in this field, the company has consistently delivered innovative solutions and products driven by AI technology.
However, given the significant run-up in its share price already experienced, current valuations simply leave limited room for any short-term upside.
Is this a buying opportunity for MSFT investors?
In my opinion, this sell-off would most likely flush out impatient investors seeking quick returns from AI.
That said, for investors looking at areas to accumulate, here’s how the charts are shaping up.
I’m compelled to suggest that price action would test the 50-day Moving Average (Blue Line). We are already at $338 at the time of writing, hence it is likely for the price action to retest the 50-day Moving Average at approx. $330+.
Following some consolidation at $330+, should we see further downside, it is likely that the psychological support level of $300 would be tested. $300 has typically been a very volatile range for Microsoft, given that this area has seen much volatility and consolidation in the past.
I would certainly look to add on to my position at $300 given that that would be ~20% off its all-time high.
Yes, there is an opportunity here but not now
While it is natural for investors to expect continued progress and success from Microsoft’s ventures into AI technology, the bar has been set exceptionally high for the company this time around.
I believe that the run-up this year has set Microsoft’s share price a little too ahead of itself bearing in mind that new all-time highs were made this year.
This sell-off though warranted does present a buying opportunity, hence I will be looking more closely at Microsoft from here, with my price alert set at $305.
