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Microsoft (MSFT) will report its quarterly earnings results after the close today, and the markets will be looking to see how demand for the company’s products and services is holding up. Microsoft has missed most of this month’s rally in technology stocks on concerns about an expected slowdown in the company’s cloud-computing business.
In recent years, Microsoft has outperformed the Nasdaq 100 Stock Index ($IUXX) (QQQ) as the company has been able to withstand an uncertain environment for IT spending due to the rapid growth of its cloud-computing business. However, Microsoft said last week that it plans to cut 10,000 jobs or about 5% of its workforce, as it acknowledged weakening consumer demand. Later today, Microsoft is expected to post a Q2 sales gain of +2%, the slowest quarterly revenue increase since 2017.
Some analysts are turning negative on Microsoft and say it won’t be time to buy the stock until a slowdown or contraction is more fully priced in. Guggenheim Securities last week downgraded Microsoft to a sell, the first on the stock in more than three years. Also, UBS Group AG downgraded the stock, saying that its Azure could-computing business “is entering a steep growth deceleration that could prove to be worse in fiscal 2023/24 than investors are modeling.”
According to Bloomberg data, analysts expect sales in Microsoft’s Azure cloud-computing platform to increase +34% at constant exchange rates this year and then slow to a +24% gain in 2024. In October, Microsoft warned that Azure sales would rise about 37% in its fiscal second quarter that ended in December, down from a 42% rate in the prior quarter.
Even after Microsoft fell 29% last year, it trades at about 23 times projected earnings, just above its 10-year average. BNP Paribas Exane said, “the public cloud segment has been the strongest secular growth trend in all of enterprise IT recently.” However, if the cloud business is weakening, then that would make “investors even more cautious about the market overall.”
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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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