Microsoft Earnings Were Meh, We Remain Buyers Anyway (NASDAQ:MSFT)

Dog day dreaming

The appropriate reaction to MSFT earnings today

Tetiana Garkusha/iStock via Getty Images

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Pass The Espresso Please Marjorie

Microsoft (NASDAQ:MSFT) reported earnings after the close today. The print came off the back of a very big up-day in almost all risk assets (see Seeking Alpha’s market commentary of the day, here). Microsoft through the day moved relatively little, that said – it was up one point something percent at one point but went about its day with nothing like the chutzpah of your Snap (SNAP) (+13%), your HubSpot (HUBS) (+10%) or your Roblox (RBLX) (+8%). Heck, even the stock that never goes up, Spire (SPIR), was up 7% on the day. Microsoft was, in short, already boring the market before the print.

And as usual, Redmond’s finest offered no particular surprises. Revenue growth is slowing, and cash flow margins are down. The balance sheet remains that of a small but successful nation state. Deferred revenue – prepaid, yet-to-be-recognized revenue, which is a little window into future rates of growth, also slowed. But nothing was dramatic. The press release could just say, “Dear Investors, Q1 was, how shall we say, meh. Nothing to see here, move along.”

The most important thing affecting Microsoft stock is, we think, overall equity market sentiment. Nothing in the company’s numbers today ought to cause a big move up or a big sell-off on a single-name basis. Most likely the only reason the stock is down in the face of a beat is that it caught a cold – just a cold, not monkeypox or batpox – from Google (GOOG) (GOOGL), which missed.

We lay out the numbers below.

MSFT Financial Table I

MSFT Financial Table I (Company SEC filings, YCharts.com, Cestrian Analysis)

Valuation is fine for a buyer, looking a little chunky for the rate of revenue growth, but it’s not enough alone to put us off.

MSFT Valuation Table

MSFT Valuation Table (Company SEC filings, Cestrian Analysis, YCharts.com)

The real action and decision-making is, we believe, in the stock chart. Here’s our take on the outlook. For context, we believe the market is likely to move up toward year-end and lift any boat with it that’s not fatally holed beneath the waterline. Fortunately, the local lows in both the indices and major single-name stocks like Microsoft remain close by, so if buying today in anticipation of a run-up which fails to appear, you can set a stop-loss which is near enough to be protective but not so close that it will definitely be hunted right before the stock moons without you.

You can open a full page version of this chart, here.

MSFT Stock Chart

MSFT Stock Chart (Cestrian Capital Research, TrendSpider)

If you’re minded to buying Microsoft, we propose a fairly tight risk/reward approach above. First up, risk management. You could place a tight stop just below the 0.5 retrace of that large Wave 3 up you see that took place coming out of the COVID crisis. That means in say the high $230s/share, so, not too far from here. A looser stop would be just below the spike lows (say in the $215 zip code). We think the stock can be accumulated between your choice of stop level and around $267/share. We believe a solid bull target to be $350, which would be an all-time high, and a bullish bull target would be around $379, representing the 0.786 extension of the combined Waves 1 and 3 you see above. If we were pursuing that bullish bull target, we would probably use trailing stops to protect gains if it started moving up.

So, once again, nothing much of great excitement coming from Microsoft – in many ways that is to be welcomed. We believe the improving market sentiment – or perhaps that is better described as the fear of being too fearful – can lift this and many other stocks; and we think the operating performance is sufficient to enable technicals to lift the stock.

Accumulate rating, per the chart above.

Cestrian Capital Research, Inc – 25 October 2022.

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