Nasdaq 100 Outlook: Where next for MSFT stock ahead of Q3 earnings?

When will Microsoft release Q3 earnings?

Microsoft is scheduled to report earnings for the third quarter of its financial year after US markets close on Tuesday April 25. A conference call is pencilled-in on the same day at 1430 PT.

Microsoft Q3 earnings consensus

Microsoft is forecast to report a 3.6% year-on-year rise in quarterly revenue to $51.1 billion while adjusted EPS is expected to rise 0.7% to $2.24, according to consensus numbers from Bloomberg.

Microsoft Q3 earnings preview

Microsoft saw earnings drop for the first time in seven years in the last quarter, but Wall Street believes this was a temporary blip and expect the company to be the only member of Big Tech to squeeze out bottom-line growth this earnings season. The tech behemoth has proven more resilient than its rivals, partly thanks to its more diversified offering, but it is not immune to the broader slowdown affecting the industry.

Demand for computers, Xbox gaming consoles and other hardware remains under pressure and sales are forecast to decline 15.6% from the year before this quarter, which would represent the third straight period of declines. Although the fall in sales is easing, markets are not anticipating a return to growth here until the final three months of 2023. Any signs that a speedier recovery is on the cards would be welcome.

Meanwhile, its Productivity & Business Processes, driven by its Office suite and other software, is expected to see sales rise 8.3%, while its Intelligent Cloud arm is set to see revenue expand just under 15% - although its core and closely-watched Azure unit is expected to maintain topline growth of over 30%.

The critical nature of these products and services for both businesses and consumers is allowing them to power ahead despite tougher economic conditions and tighter spending by customers, but both segments (including Azure) have seen the brakes slammed on growth compared to the rapid rates we saw the year before, when software sales rose 22% and cloud computing jumped by over 30%.

Sustaining topline growth, however mild, is crucial if Microsoft is to protect profits as costs continue to rise at a much faster pace, forecast to increase 9.8% from last year this quarter. Still, that would mark welcome progress considering expenses have risen by double-digit rates for the last six quarters. We should see further improvements here going forward now that Microsoft has started to crackdown on costs and lay off employees, having announced 10,000 layoffs in January when it vowed to refocus on ‘secular growth and long-term competitiveness’.

Markets are hoping that better cost control and an acceleration in revenue growth will make a marked difference in the final quarter of its financial year, which would set the stage for a much more positive outlook for both the top and bottom lines in the new financial year. Risks of a recession later this year poses a threat to expectations and any deterioration in the near-term outlook could prompt Microsoft to take more drastic action on costs. Microsoft’s workforce has expanded 53% since the start of the pandemic and, although that is milder versus some rivals after Meta, Alphabet and Amazon more than doubled their headcount in the same timeframe, there may be a desire to trim some more fat if it needs to protect profitability further.

Investors will be keen to hear how Microsoft is capitalizing on new catalysts from artificial intelligence. Microsoft made its initial investment in OpenAI, the company behind AI chatbot ChatGPT, back in 2019 but expanded its partnership after making a ‘multibillion dollar investment’ into the company in January. At that time, UBS estimated ChatGPT was the fastest-growing consumer app of all time after securing over 100 million users within the first two months of being launched and Microsoft is now looking at ways of integrating OpenAI’s products into its suite of services and products, including its Bing search engine.

That is significant considering Microsoft has declared war on Alphabet’s Google, having said it is willing to accept any demonsetisation and a lower margin to destabilise Google’s monopoly over internet search. There have already been signs that Microsoft is starting to threaten Alphabet amid reports that Samsung, the world’s largest producer of smartphones, has considered dumping Google as the default search engine on its devices and turning to AI-powered Bing. Still, it is very early days and it could still be some time before we see a AI provide a tangible boost to Microsoft’s results even if it is attracting interest from advertisers and other businesses.

Where next for MSFT stock?

The weekly chart shows that Microsoft stock is battling against a tough ceiling at $292, which has managed to hold firm on multiple occasions over the past year.

Notably, the 54 brokers that cover Microsoft see slightly further upside potential with the average target price sat at $300.50, which has risen since the start of 2023 despite the uncertain economic outlook.

A break above here would be significant and could propel the stock toward the peaks we saw in the first three months of 2022 at $310.

On the downside, the 100-day moving average, currently at $277.50, should provide some support if the stock comes under renewed pressure. If not, we could see shares slide toward $245, which has emerged as a level of support on multiple occasions stretching back to mid-2021.

Traders should also keep an eye on the Nasdaq 100 considering Microsoft carries the largest weight of any individual stock, making up over 12.6% of the index.

Take advantage of extended hours trading

Microsoft will release earnings after markets close and most traders must wait until they reopen the 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.

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