Microsoft Stock Rises 8% on Strong Cloud and AI Revenue Growth

Key Insights

• Microsoft stock gained about 8% in premarket trading after its earnings report.
• Revenue rose 18% as Azure and Microsoft Cloud recorded stronger growth.
• Analysts retained bullish targets as Microsoft’s artificial intelligence business expanded.

Microsoft stock jumped in premarket trading after the company reported stronger fiscal fourth-quarter earnings.

MSFT gained about 8% to $423, with some premarket quotes approaching $425. The advance placed the stock about 22% above its year-to-date low.

The gains followed stronger revenue, earnings and cloud growth. However, investors must determine whether the move represents a sustained recovery or a post-earnings relief rally.

Top Wall Street analysts are bullish on the MSFT stock, which they believe is highly undervalued after falling sharply in the past few months. In a note today, July 30, Keith Bachman, a BMO analyst, maintained the outperform rating and boosted the target from $500 to $515.

Other analysts have boosted their targets. Piper Sandler’s Billy Fitzsimmons boosted his target from $540 to $550. Citizens and Guggenheim analysts have a target of $550 and $586.

These upgrades comes as the company releases strong financial results. It noted that its revenue jumped by 18% in the fourth quarter of the fiscal year to $90 billion, with its operating income soaring by 18% to $40.6 billion.

Most notably, the company’s profitability continued to thrive, hitting a high of $35.8 billion. One reason for this jump was that the value of its Anthropic investment jumped by $3.2 billion in the quarter as the company’s valuation hit $900 billion.

By segment, Microsoft Cloud’s revenue jumped by 27% to $59.3 billion, while its productivity and business processes soared by 14% to $37.8 billion. Its intelligent cloud revenue soared by 32% to $39.3 billion, while remaining performance obligations rose to $678 billion.

However, the only blemish in this report was its personal computing business, whose revenue dropped by 4% to $12.9 billion. This retreat was mostly because of the Windows OEM and XBOX segments that are struggling as memory chip prices surge.

Microsoft stock also jumped as its Copilot business continued growing. In its statement, the management said that its paid Microsoft 365 Copilot seats jumped to 30 million from 15 million in the previous quarter. Still, despite the investments, Copilot’s market share remains tiny compared to other products.

Microsoft stock price jumped after the company tweaked its capital expenditure plans. In a statement, it said that the capex jumped to $41 billion in the fourth quarter. It expects to tweak its capex by changing its leases from 15 years to 25 years. It now expects to spend about $175 billion this year. Other companies like Tesla and Google have boosted their capex.

Meanwhile, Microsoft’s valuation remains substantially lower than its historical standards. Its forward price-to-earnings ratio remains at 20, much lower than the five-year average of 30. Also, the multiple is lower than the sector median of 22.

The Rule-of-40 multiple also shows that it is a bargain. It has a revenue growth of 18% and an operating margin of 45%, giving it a multiple of 63%. By using the net income margin of 38%, the multiple is 56%.

These valuation metrics explain why the company has continued to boost its share buybacks. It spent $10 billion in buybacks and dividends in the fourth quarter and $43 billion in the last fiscal year.

The daily chart showed Microsoft stock finding support near $356 during March and June. Those two lows created a possible double-bottom structure.

However, the pattern’s neckline stood near $466 under the supplied chart. That means the double bottom remained unconfirmed while MSFT traded near $425.

Microsoft stock moved above its 50-day exponential moving average and short-term resistance near $405. The breakout improved momentum and shifted attention toward $425 and $466.

A sustained close above $466 would confirm the larger double-bottom structure. It could also expose higher resistance from the previous trading range.

However, the sharp earnings gap increased the possibility of short-term profit-taking.

A drop below $405 would weaken the immediate breakout. A decline below $388 would invalidate the bullish short-term setup and place the $356 support region back in focus.

Microsoft’s earnings supported a stronger fundamental outlook. Further gains now depend on whether the stock holds its post-earnings breakout and advances toward $466.

The post Microsoft Stock Jumps as Cloud and AI Revenue Beat Estimates appeared first on The Market Periodical.