Will Microsoft’s results improve sentiment towards the tech giants?

Silicon Valley giant Microsoft (MSFT.US) will report its fourth quarter 2022 results after today’s US trading session. Wall Street expects the weakest sales growth in almost 6 years. What to expect in Microsoft’s results and what will analysts be looking for? A better than expected report would give markets hope that reports from other BigTechs could beat expectations.

forecasts

Sales volume: $52.96 billion (2.4% YoY growth)

Earnings per share (EPS): $2.30 vs. $2.48 in Q4 2021 (9% yoy decrease)

  • Analysts expect increased cloud computing (Azure) spending from inflation-stricken companies to slow and hit Microsoft’s high-margin business. The end of the pandemic (lower demand for remote work and education) has led to lower demand for cloud and software (Windows) due to lower PC sales (global PC shipments are down 29% in the fourth quarter);
  • Vesible Alpha estimates that Azure is expected to grow 31% in the fourth quarter (the slowest growth since Microsoft started reporting it in 2015). In the third quarter of 2023, Azure’s growth slowed to 35% from 50% a year ago, and it looks like anything above 35% year-over-year is satisfying the market today;
  • Sentiment in tech heading into earnings season is not the best, which could be due to a spate of job cuts on the expected slowdown. Microsoft announced layoffs of 10,000 employees (less than 5%) and cuts in IT spending, although analysts said demand for the company’s services and products will remain high.

Microsoft (MSFT.US) equity analyst ratings as of January 19, 2023. Buyers clearly predominate and the number of buy recommendations has not changed significantly since 2021. Source: capital.com

cloud computing

  • RBC Capital Markets analysts noted that many companies are slowing down data migration to the cloud and are negotiating the price of existing plans. Demand concerns have also been raised by UBS analysts that the simplest data to move to the cloud is already there. Last week, Microsoft CEO Satya Nadella hinted that companies were treading cautiously amid recession concerns;
  • The risk of a recession continues to affect the operations of thousands of companies, which is why Microsoft has previously announced that it expects cloud computing revenue to slow. Analysts will be paying close attention to the company’s announcements for the remainder of 2023, when a recession in the United States is not ruled out. On the other hand, cloud activity is on a long-term uptrend and a full collapse in demand remains unlikely given technological advances.

Artificial intelligence

  • Microsoft is cutting costs and investing in new projects that could solidify or expand its long-term competitive advantage. Analysts will pay special attention to OpenAI (ChatGPT) as the company has made unprecedented investments in artificial intelligence in recent months;
  • According to Wedbush Securities, investing in AI is a strategic move by Microsoft as more use cases will drive unprecedented demand for artificial intelligence and more advanced search tools Alphabet (GOOGL.US) could take market share over time. Still, the cost per request for ChatGPT is much higher than the competition;
  • Microsoft plans to increase its investment in OpenAI by another $10 billion, in which case it will receive 75% of the company’s profit sharing until full return on its investment, after which it will keep 49%;
  • It remains unclear whether Microsoft’s $75 billion acquisition of gaming giant Activision Blizzard (ATVI.US) will materialize amid antitrust comments from regulators (FTC).

Microsoft (MSFT.US), interval D1. The SMA200 moving average around $255 remains the main resistance. On the upside, we can see that the price has formed a solid base around $220, from where buyers can target a retest of the SMA200 on positive results. Source: xStation5

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