Microsoft Corporation $Microsoft(MSFT)$ is reporting Q3 2022 earnings after market closed on Tue 26 Apr. Analysts generally expect positive beats on most metrics, but I bet they would be focusing on two particular segments’ forward guidance, cloud and gaming. Why? Read on...
Cloud and Gaming Segments
Over the past few years (see infographic), Azure, its server products and cloud services segment has been fuelling Microsoft growth, driven largely by the digitalisation and then the pandemic induced work-and-study at home economy. It’s now its biggest revenue generator at 31% share, surpassing Office (24%) and Windows (14%) segment. Windows growth would slow further, with PC shipments expected to decreased 5.1% this year, and the cycle of upgrading Office products might not coincide with 2022.
Thus, Microsoft has to grow other segments and gaming is the natural next choice to augment its X-box platform. Currently at 9% revenue, gaming revenue is expected to rise with the acquisition of Activision Blizzard $Activision Blizzard(ATVI)$, which if approved by regulators, likely starts contributing to Microsoft bottom line by 2023.
MSFT revenue breakdown 2021 Source: The Grey Rhino and Microsoft Annual Report
Image credits: Anadolu Agency / Getty Images
Positive and Negative Scenario
Looking at Daily Chart of Microsoft, we can see price action has been bearish since it peaked in Nov 2021, and on a downtrend. Using Fibonacci retracement, we can identified key levels to watch.
Daily Chart MSFT
If we have earnings beat and positive forward guidance, we would likely see price bouncing off the support level of $270 as it has done in the past, to target 0.236 Fib level of $288.
If on the other hand, earnings missed or poor forward guidance, we would likely see the support level of $270 break and price drop to next support zone of $245 to 260.
How would I trade?
I would probably wait and see, and trade $Microsoft(MSFT)$ after earnings, as recent huge $Netflix(NFLX)$ price drop post-earnings served as a timely caution.
It is fine if I do not catch the whole earnings move, as preserving capital is more important than the risk of losing more than 35% of allocated funds, for trades gone wrong.
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