Microsoft to unveil earnings as AI-powered boom persists – Stock Markets

17Jan2024226 GMT- Marios Hadjikyriacos

• Microsoft will release quarterly earnings on Tuesday, January 30, after closing bell

• A strong quarter is expected, driven by artificial intelligence operations

• Shares are expensive from a valuation perspective, reflecting future growth  

 

Microsoft takes the crown

With its share price rocketing higher in recent months, Microsoft has become the world’s most valuable company by market capitalization, taking the crown away from Apple. The tech titan has established itself as a major player in several rapidly-growing industries such as cloud computing, video games, and artificial intelligence (AI). 

Indeed, Microsoft has been at the forefront of the AI revolution, thanks to its acquisition of OpenAI, the company behind the ChatGPT model. Investors increasingly believe that even if the global economy loses steam, demand for AI products will still remain elevated, shielding corporate profits from any macroeconomic weakness. 

Microsoft’s clients are mostly other businesses that are investing in their AI capabilities, not regular consumers that are struggling under the cost of living crisis. This sense of resilience has helped fuel the stunning rally in Microsoft shares, which reached a new record high this week. 

Stellar quarter expected

For the final quarter of 2023, analysts expect Microsoft to report earnings per share of $2.78, which would represent a powerful increase of around 20% from the same quarter in the previous year. Similarly, revenue is projected to have risen by nearly 16% from last year. 

Hence, the hype surrounding artificial intelligence has started to translate into a massive earnings boost for Microsoft. That said, the market reaction will depend on whether the actual results are stronger or weaker than markets anticipate, as well as any guidance by management about the future outlook. 

It is worth highlighting that Microsoft has a strong history of beating earnings estimates, having done so in all four of the preceding quarters. Hence, another upside surprise seems like the most likely outcome, which could generate even greater demand for Microsoft shares. 

Looking at the chart, Microsoft shares are already trading at record highs, so the most important region to watch on the upside might be the $400.00 psychological region. 

On the flipside, in case of a disappointment in earnings that catches optimistic investors off guard, the previous high of $390.00 could come into play to halt any selloff. If sellers manage to pierce below it, the focus would then shift towards the $377.00 zone. 

Valuation is pretty expensive

One red flag about Microsoft shares is how expensive they have become from a valuation perspective. The stock price is currently trading at over 32 times what analysts expect earnings to be this year, which even for Microsoft is a stretched valuation. 

Excluding the pandemic years, the last time Microsoft traded at a similar valuation was back in 2002, when the ‘dot com’ bubble was bursting. Therefore, the market has already priced in much of the future growth prospects, which limits the upside potential for the stock, as the bar has already been set quite high.  

All told, the future for Microsoft as a company seems bright as the AI revolution might still be in its early stages. That said, the stock’s hefty valuation already reflects this optimism, so the scope for further near-term gains appears somewhat limited.