Microsoft stock tumbles as outlook points to more pain

Microsoft stock plunges 6% on weak outlook

Microsoft shares are down 6% in extended hours trade after its outlook failed to impress the markets.

Microsoft: Growth continues to stall

Microsoft reported an 11% rise in revenue in the first quarter of its new financial year to $50.1 billion and a 13% drop in diluted EPS to $2.35.

Revenue came in higher than the $49.66 billion forecast by Wall Street and EPS was ahead of the $2.31 pencilled-in by analysts. Still, it marked the fifth consecutive quarter of slower year-on-year revenue growth.

Microsoft provides an array of vital services and products to businesses, such as cloud computing and software, and this has allowed it to continue to grow sales in a tough environment. However, that marked the slowest quarterly revenue growth in five years and has sparked concerns that the days of reliable double-digit growth are coming to an end.

It is worth noting that the strong US dollar was a headwind considering revenue was up 16% and EPS was down just 7% at constant currency.

Microsoft’s biggest division is Intelligent Cloud, its cloud-computing arm that is underpinned by Azure, and this saw revenue rise 20% to $20.3 billion to meet expectations.

Microsoft’s arm responsible for its Office software, Dynamics products and the LinkedIn platform reported a 9% rise in revenue to $16.5 billion, which came in ahead of the $16.1 billion forecast. Software remains in demand as it is vital for both businesses and consumers, while its recruitment-focused social media platform delivered a strong 17% jump in revenue.

That helped counter the 3% drop in sales from its More Personal Computing unit that makes its money from Xbox gaming consoles, Surface laptops, its Windows operating system and its search and advertising operation. This was expected given the widely reported slowdown in demand for consumer electronics, which in turn also weighs on demand for its operating system. Notably, search and advertising were bright spots after growing sales by 16% in the quarter.

Operating profits came in higher than anticipated from software and cloud-computing, although More Personal Computing fell far short of expectations.

Notably, revenue from Microsoft Cloud – which encompasses all its cloud computing operations across its divisions – rose 24% in the quarter to $25.7 billion, marking the first time this has accounted for over half of its total revenue.

Microsoft’s outlook points to more pain

A disappointing outlook is also knocking confidence today after Microsoft said it expects to deliver $52.35 billion to $53.35 billion in revenue in the second quarter to the end of December. The mid-point of that range would be just 2% higher than what was delivered the year before.

That suggests the foot has only just started to come down on the brakes. The guidance was disappointing for Wall Street that forecast revenue would rise 6.8% and hit $56.05 billion this quarter. Its operating margin target of 40% was also shy of the 42% forecast.

The sales outlook was weaker across all its divisions, suggesting the slowdown is taking hold quicker than markets had expected. More Personal Computing was the biggest drag after Microsoft said revenue would be as much as $14.9 billion this quarter, nowhere near the $17.0 billion estimate. It also warned Azure’s constant currency growth would stall to around 37% this quarter from 42% in the recently ended one.

CEO Satya Nadella conceded that Microsoft’s consumer business is suffering from cyclical trends, but its operations serving businesses, while slowing down, is proving more resilient. Chief financial officer Amy Hood said demand for Microsoft’s cloud operations from businesses remains ‘healthy’ and that it was ‘another quarter of solid bookings’.

Investors had hoped that the strength of azure and cloud computing would help counter any softness on the consumer side, but the warning that this will also continue to slow is eroding that optimism and is likely to lead to forecasts being curtailed further.

Where next for MSFT stock?

Microsoft shares are down 5.6% in extended hours trade today at $236.75.

That has brought the $234.50 level of support back into play, which investors hope can remerge as a floor to avoid bringing in the firmer level of support at $224 mark back into view, in-line with the level of resistance in late 2021 that turned to support in early 2021. Any move below here brings the 22-month low of $219 back onto the radar.

The stock managed to close above the $250 mark yesterday after testing the $250.60 ceiling we have seen over the past month, which is currently aligning with the 50-day moving average. This is now a renewed upside target, although the stock will need to recapture the $241.50 low we saw back in June beforehand.

Ready for Big Tech earnings?

Microsoft is not the only one struggling to impress the markets today, with Alphabet shares also in freefall after revenue growth stalled thanks to the slowdown in demand for advertising amid the fragile economic climate. You can read more on the Alphabet earnings here.

That has spooked investors ahead of earnings out from other Big Tech stocks this week. Meta, which also relies on advertising, is expected to suffer an even bigger hit than its larger rival Alphabet when it reports later today and we could see fears that Facebook has reached its peak remerge considering Wall Street believes it will have lost over 100 million users in the latest quarter. Meta is trading over 4% lower in extended hours following the update from Alphabet. You can find out what to expect today in our Meta Q3 Earnings Preview.

There is more to come. Apple, which sits atop Big Tech in terms of valuation, will report on Thursday and all eyes are on the popularity of Apple’s new iPhone 14 that hit the shelves earlier this month. Questions remain over how demand will fare ahead of the busy holiday shopping season, and some analysts believe China could cause a disappointment. You can read more on what to expect in our Apple Q4 Earnings Preview.

Amazon also reports quarterly results tomorrow and is expected to deliver strong double-digit sales growth. Its core ecommerce operation, cloud-computing and array of other activities are all forecast to contribute, but earnings could hit their trough this quarter as it grapples with rising costs. You can read more in our Amazon Q3 Earnings Preview.

Take advantage of extended hours trading

Microsoft released earnings after US markets closed yesterday and this means most must wait until they reopen today before being able to trade. But by then, the news has already been digested and the instant reaction in share price has happened in after-hours trading. To react immediately, traders should take their positions in pre-and post-market sessions.

With this in mind, you can take advantage of our service that allows you to trade Big Tech stocks using our extended hours offering.

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