Microsoft (NASDAQ:MSFT) stock has been crushing it this year.
After a big run higher on the heels of the tech giant’s massive leap into artificial intelligence, the market is starting to take a breather with MSFT stock.
While this comes despite releasing a strong earnings report late last month, it makes some sense that investors decided to “sell the news” post-earnings. “AI mania” is simmering down. Concerns about the macro picture are rising again as well.
So, with this sentiment shift, is it time to sell or avoid this stock, ahead of further declines? Not so fast. While it is certainly possible that investors went a little overboard about this company and its high exposure to the rise of generative AI, this trend is real, and it’s not going away.
Hence, consider MSFT’s recent weakness to be a favorable development. Here’s why.
MSFT Stock: Reversing Course After Earnings
Already trading sideways in the lead-up to its July 25 earnings report, in the two weeks since the release of its latest results and guidance, Microsoft has given back a portion of its 2023 gains.
Again, it’s not as if the company reported disappointing fiscal results. For the company’s fiscal fourth quarter (ending June 3o), Microsoft’s revenue came in at $56.2 billion, up 8% year-over-year. Earnings per share came in at $2.69, representing a 21% increase compared to the prior year’s quarter.
Besides demonstrating strong growth, even as the tech slowdown weighs on demand, these figures came in ahead of analyst expectations. Revenue beat sell-side forecasts by nearly $700 million.
The aforementioned EPS figure beat the street’s number by 14 cents. Unfortunately, unlike with the last earnings report (in late April), market conditions have outweighed these promising numbers.
Hence, a post-earnings reversal for MSFT stock rather than a post-earnings surge. Yet while waning AI mania, has created a frustrating experience for existing investors, now is not the time to realize gains. Nor is it the time for prospective Microsoft investors to stay away.
A Banner Year Ahead?
MSFT may move lower, but make no mistake. The company’s generative AI catalyst is strengthening, not weakening. Yes, generative AI played just a small role in Microsoft’s revenue and earnings beat last quarter.
This may also explain why the market had such a cool reaction to results.
Yet while management has conceded that the financial impact of integrating generative AI technology into Microsoft’s many platforms will lead to “gradual” growth, expect this factor into results beginning this quarter, which marks the start of the company’s fiscal year ending June 2024.
As I discussed when last talking about MSFT stock, there are signs that success monetizing this technology could end up being greater than currently expected, such as the pricing Microsoft is able to command for its generative-AI enabled Microsoft 365 Copilot platform. That’s not all.
The segments of Microsoft’s business experiencing a downturn right now (like its Personal Computing unit) could start to report stronger results, as the tech slowdown eases, and a sector recovery takes shape. In short, a banner year may lie ahead for the company, resulting in EPS that comes in ahead of even the top end of current forecasts.
Sliding Back into the Buy Zone
Per the sell-side, Microsoft could earn as much as $11.76 per share in FY24. With the stock changing hands for around $330 per share today, that implies a forward valuation of around 28 times earnings.
While a premium multiple, this valuation is more-than-sustainable. If results beat/exceed this top-end forecast, bouncing back after the recent sell-off is well within reach. During the following fiscal year, EPS could be as high as $14.02.
If it becomes all-but-certain Microsoft will stay in high growth mode for years to come, MSFT could time re-hit its past high, and hit even loftier price levels ($400, $450, perhaps prices north of $500 per share).
As the bull case gets stronger, while shares fall back, MSFT stock could soon slide back into the buy zone. If this happens, consider entering/adding to a position.
MSFT stock earns a B rating in Portfolio Grader.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
