Will earnings be the turning point for Microsoft stock?

Microsoft stock has retreated sharply in the past few months, moving from a record high of $556 in October last year to $390. This retreat has pushed its market capitalization from over $3.89 trillion to $2.9 trillion today. This article highlights what to expect as its fourth-quarter earnings loom.

Microsoft stock has dropped amid capex concerns

MSFT stock has plunged in the past few months as investors remain concerned about its massive capital spending plans. 

In its last financial results, the company said that its capital expenditure will be $190 billion. That will be a 61% increase from what it spent last year, and is partly because of the rising cost of memory, semiconductors, and server costs. 

As we saw with Alphabet last year, a decision to boost its capex will likely drag the stock lower. Google stock has dropped by nearly 20% from its highest point this year.

Investors are concerned about the return on investment (RoI) of all these investments over time. Specifically, they are concerned about Copilot, its flagship AI product. Despite huge investments, which has a market share of about 10%. It severely lags behind other platforms like Claude and ChatGPT.

Most notably, many companies are not using the platform as widely expected. For example, while the platform has over 218 million users, only 15 million users are paying for the platform, and the growth may decelerate. 

There are also concerns about the disruption by other companies, especially the Chinese. Data shows that Kimi has become one of the most advanced models in the LLM industry. Other Chinese models like Qwen and GLM are also gaining market share. 

Analysts expect Microsoft’s growth to slow

Analysts expect that Microsoft’s growth grew at a slower pace than it did in the past. The average estimate among analysts is that its revenue grew by 14.70% in the quarter to $87.67 billion. Its earnings growth is expected to come in at 16% to $4.24. 

In addition to the topline number, traders will watch out for the AWS growth. The most recent earnings showed that its intelligence cloud growth rose by 28% in the third quarter to $34.7 billion. Its productivity and business processes rose by 13% to $35 billion, while its more personal computing segment dropped by 3% to $13.2 billion.

Microsoft stock has become a bargain, with its forward price-to-earnings ratio falling to 22.76. This multiple is slightly lower than the sector median of 24 and the five-year average of 32. Similarly, the company has a rule-of-40 metric of 64%. These metrics mean that the company may decide to boost its dividends and buybacks.

MSFT stock price technical analysis

Microsoft stock chart | Source: TradingView

The daily chart shows that Microsoft shares have been in a downtrend in the past few months. As a result, it has dropped below all moving averages, a sign that bears are in control.

The stock has formed a double-bottom pattern at $355 and a neckline at $465, its jighest point on June 1. This pattern often leads to a rebound. The two lines of the MACD indicator are about to cross the zero line.

Therefore, the stock will likely bounce back after its earnings report on Wednesday. The options market is pricing in a 8% move after its earnings, with its put-to-call option being at 0.42.