Here comes the Big Tech brigade. This week will see several of the Street’s tech giants deliver their latest financial reports and Microsoft (NASDAQ:MSFT) will be amongst them. After the bell rings to bring Tuesday’s action to a close, the company will release its FY23 Q2 report.
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It’s not going to be a resolutely bullish affair, says Piper Sandler analyst Brent Bracelin.
“MSFT faces significant headwinds that could pressure constant currency growth to moderate to 6%, which would be the lowest growth rate in six years,” the analyst explained. “The primary culprits are the more cyclical non-cloud segments (>50% of revenue) that in aggregate could decline by double-digits for the second consecutive quarter, which partially offsets healthy cloud growth of 19%.”
That said, despite the revenue headwinds and big investment in AI, Bracelin thinks EPS growth could be insulated, given the expected interest income generated from rising rates on outsized cash reserves of ~$100 billion and further helped along by “tight operating controls.”
On the other hand, following 20+ years of hypergrowth, given optimization endeavors and the law of large numbers, Bracelin believes the $350 billion+ cloud industry proxy has now set off on a period of “mid-cycle moderation.” Therefore, after years of keeping the growth rate above 45%, in 2H of FY23, Azure could see a drop to 27%-30% growth.
Given the hoopla around all things generative AI and Microsoft’s role to play in this $100 billion+ opportunity, shares are up by 19% year-to-date, compared to the S&P 500‘s 7.6% haul. Yet, Bracelin thinks near-term enthusiasm might be blunted by the decelerating “demand fundamentals and eroding commercial bookings trends.”
But that’s not a given, however. “The durability of EPS growth, a potential trough in Azure new consumption growth rates, and generative AI optimism may overshadow the growth challenges,” the analyst went on to optimistically add.
All told, Bracelin sticks with an Overweight (i.e., Buy) rating although that rating is backed by a $290 price target, indicating the shares are currently trading near their fair value. (To watch Bracelin’s track record, click here)
Overall, most analysts remain in Microsoft’s corner. The stock’s Strong Buy consensus rating is based on 27 Buys vs. 4 Holds and 1 Sell. The average target stands at $306.95, making room for one-year gains of ~10%. (See Microsoft stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
