Key points
- Microsoft had a solid quarter and led higher, making the post-release sell-off a buying opportunity.
- Cloud and artificial intelligence contribute to the strength of the company; Artificial intelligence is still in its infancy.
- The charts suggest that a move to the $450 level is the minimum that investors should expect.
- 5 titles that we prefer to those of Microsoft
Microsoft’s NASDAQ:MSFT the stock price is driven by its growing position in the cloud. Late in the game, Microsoft focused on the cloud, cloud services and artificial intelligence, gaining share from Amazon Web Services, Google, Alibaba and others. The stock price is retreating following fourth-quarter results, suggesting a top is in play, but investors shouldn’t be so quick to miss out on their shares.
The fourth quarter results did not trigger a rally for this tech stock or a massive correction. The stock’s pullback is a healthy consolidation of gains made over the past year, with more gains to come. The technical outlook for Microsoft is solid and suggests a move to $450 is on the way.
The technical action in MSFT is very significant. The market bottomed in late 2022, then reversed course in January 2023 as cloud and AI started to gain momentum and then reached new highs in late 2023. In the meantime, the market has created a very important bullish flag pattern that brings some interesting targets into play. .
The initial rally of 2023 took the stock from the bottom of a trading range to its high with a move of $110 or 45%. The Flag Pattern is a continuation signal confirmed by new highs set later in the year, putting targets between $450 and $490 into play. $110 plus $340 (the Flag pattern breakout point) equals $450, and $340 plus 45% is $493.
What could take Microsoft to new heights?
Artificial intelligence is what will take Microsoft to new heights. The company is incorporating AI/co-pilot into its tech stack and appears to be in the early innings of a long game. However, the company is firing on all cylinders in all primary operating segments during the fourth quarter.
The company posted net revenue of $62.02 billion, led by a 20% gain in Intelligent Cloud, beating analyst consensus by 150 basis points. The CI is driven by a 24% increase in cloud services and a 30% increase in Azure, the company’s cloud platform and home to its AI models. More personal computing increased 18%, including the impact of Activision-Blizzard and Product and Business Services increased 13%.
Margin news is also favorable, with gross and operating margins above consensus figures. The margin is aided by internal efficiencies aided by AI and revenue leverage attributed to cloud and AI. The net result is a 33% increase in operating and net income, a 33% increase in GAAP earnings, and a 26% increase in adjusted earnings.
The guidance is also favorable to an increase in share prices. The company guided the first quarter to a seasonally expected sequential decline, but up 13% year-over-year and above analysts’ consensus forecasts. The indications are also potentially cautious, given the trend in business spending. If ten companies buy NVIDIA and AMD accelerators to build cloud infrastructure, another 1,000 look to the cloud for its utility, and Microsoft is a clear leader in cloud services.
Analysts push Microsoft higher
Analyst activity at MSFT is solid and pushing the market higher. Post-release response has been as bullish as it has been over the past 12 months and is likely to continue to be so. Wedbush analyst Dan Ives called the findings a “masterpiece” and sees the company in the early stages of the AI revolution. Wedbush’s target is $450, lower than the lofty target of $475 set by Tigress Financial, but both are in line with technical projections. The only caveat is that the current consensus is in line with recent price action and could represent a near-term headwind.
Critical resistance is now near $410 and the closing all-time high. If this market manages to move above that level soon, it will likely continue to strengthen into the first half of 2024. If not, the market is overdue for a consolidation and could enter it now. The risk is that price action sells off towards firmer support levels, a scenario that will provide a better entry point for new money.
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