Microsoft's (NASDAQ: MSFT) price action pulled back into a technical buying opportunity following the FQ1 2025/CQ3 2024 earnings release. The primary culprits are a diminished outlook for Azure growth in Q2 and increased expectations for AI spending. As bad as the news may sound, the takeaways are bullish because growth is robust, guidance is likely cautious, and the indications are that the revenue has only been pushed out, not lost. Among the critical details are delayed construction of data centers related to GPU and CPU availability and an expectation that supply/demand imbalances would diminish over time.
Microsoft Price Pulls Back After Company Clears a High Bar
Microsoft’s FQ1 results are solid and support the stock price uptrend. The company produced $65.6 billion in net revenue for a gain of 16.1%, beating the consensus forecast by 160 basis points on strengths in all segments and sub-segments. The revision trends make the outperformance more substantial; more than 90% of analysts raised their estimates for results during the quarter, and the bar was set high. Also note that the company’s revenue growth is accelerating sequentially and year over year, with solid guidance for Q2.
Segmentally, Productivity & Business, the company’s core segment, grew by 12%, More Personal Computing grew by 17%, and the all-important Intelligent Cloud grew by 20%. The IC segment was driven by a 33% gain in Azure, which outpaced the consensus by 400 basis points. Regarding the cloud, Microsoft’s net cloud-supported growth came in at 28%.
Margin news is also good, with GAAP EPS of $3.30, up by 10% year-over-year (YoY) and $0.20 or 600 better than forecasts. The company sustained a solid margin compared to last despite cost pressures, delivering a 14% increase in operating income and $24.7 billion in net income. The takeaway is that the company produced another positive cash flow quarter, increased its cash position sequentially, increased assets, reduced liability, and increased equity. Shareholder equity is up by 2% and is expected to continue improving as the year progresses.
Microsoft Issues Cautious Guidance
The guidance is the primary factor weighing on Microsoft’s price action following the report. The guidance isn’t weak, with Azure expected to grow by 31% to 32% and all other segments expected to grow, but it is down from the prior guide. However, investors should consider the guidance cautious due to business momentum and increased AI spending across the tech universe. Demand for computing and AI-enabled efficiency is high; supply is the only thing holding Microsoft back now.
NVIDIA's FQ3 earnings release and guidance for Q4 could catalyze this market. The CQ3 report from Meta Platforms (NASDAQ: META) certainly sets a stage upon which Microsoft’s future results will outperform the guidance; an indication from NVIDIA (NASDAQ: NVDA) that its GPU and CPU supply is improving would be good news. Regarding Meta, it is a Microsoft client, and it uses its services (and those of other hyper-scalers) in many ways, including data centers, clouds, cloud-based services, and AI workloads. Highlights from its CQ3 report include an increased forecast for AI spending, aligning with trends.
Analysts Trim Targets For Microsoft: Indicate New All-Time Highs Are Likely
The analysts' response to Microsoft’s news is mixed, with an equal number of price target reductions and increases. The net result of the first dozen is a slight reduction in the consensus target and a new low target for the range. However, the low target aligns with critical support at an important uptrend line, putting a potential floor in the market, while consensus implies a 15% upside from that level and a new all-time high.
The technical action is favorable, with Microsoft in a strong uptrend and the price action pulling back to trigger points, including a cluster of moving averages and the uptrend line. Assuming the market follows through on the opportunity, support should be confirmed within a day or two of the release, leading to higher prices later this year. If not, Microsoft's share price could break the trend, which is unexpected. In that scenario, the market for MSFT could fall to $390 or lower before finding firm support.
