Microsoft Beats Q2 Earnings. Where Is the Stock Headed?

Share Price Performance:

• Microsoft ($Microsoft(MSFT)$ ) has soared 8.66% year-to-date, outperforming the S&P 500 and Nasdaq-100, which have posted returns of 3.34% and 3.91% YTD, respectively.

• Microsoft's stock has increased by 90.71% from its 2022 low, rising from USD 214.25 to the current share price of USD 408.59.

• In after-hours trading, its share price is currently at a -0.28% loss, trading at USD 407.64.

2Q 2024 Earnings Call:

Both Microsoft’s revenue and EPS beat street expectations.

Revenue: $62.02 billion vs. $61.12 billion (Beat by 1.5%)

EPS: $2.93 vs. $2.78 expected (Beat by 5.4%)

Azure YoY Growth: +30% vs +27.7% expected

Guidance:

While revenue from the Productivity and Business Processes unit, Intelligent Cloud, and More Personal Computing all exceeded Wall Street estimates, Microsoft's third-quarter mid-range revenue forecast of $60.5 billion falls slightly short of the street estimate of $60.7 billion.

Azure:

Azure's 30% year-over-year growth, mostly attributable to AI, once again beat Street estimates and grew faster than the 25.7% growth in Google Cloud. The encouraging aspect of Azure's growth is that the latest 30% growth is 1 percentage point higher than one quarter earlier and only 1 percentage point lower than the same quarter one year ago. The company stated that AI-related services contributed 6 percentage points to Azure's growth in the quarter.

More Capex, Yet Improving Operating Margin:

CFO Amy Hood said,  “To support our Microsoft Cloud growth and demand for our AI platform, we will accelerate investment in our cloud infrastructure. We expect capital expenditures to increase sequentially each quarter through the year as we scale to meet demand signals.”

Despite the higher investment in cloud and AI infrastructure, the operating margin for the full fiscal year 2024 is expected to improve by one to two percentage points.

Technical Analysis:

• Microsoft stock recently surpassed its 127% Fibonacci expansion level (from the 2022 low to the 2023 July high) of USD 408.49, closing at USD 408.59.

• We anticipate the share price to stay above USD 408.49 and potentially challenge its next Fibonacci level at 141.4%, reaching USD 430.27.

• Fibonacci Extension Levels also suggest that USD 430.58 could act as a significant resistance level.

• Furthermore, we identify the range of USD 430.27 to USD 430.58 as a relatively strong support level, considering it as the Fibonacci Confluence Zone.

• Overall, we see a higher probability of the share price moving towards USD 430 before experiencing a correction.

• Fibonacci Analysis also indicates a target price at USD 461.55 (161.8% Expansion Level). Thus, we do not perceive an urgency for investors to take profit off the table yet.

Conclusion:

• We are encouraged by Microsoft's sustained growth in Azure and its projection to increase its operating margin for the full fiscal year 2024.

• We believe that Microsoft is leading in AI monetization compared to other AI application companies.

• Despite its valuation possibly being priced for perfection, growth investors are likely to favor Microsoft for AI exposure. We view the 2Q2024 earnings as a success, with both Operating Income and Net Profit increasing by 33% year-over-year this quarter.

• Microsoft may continue to outperform Apple( $Apple(AAPL)$ ) in total return this year and maintain its position as the world's most valuable company, driven by AI.