Microsoft Corrects on Solid Results as AI Is Already Priced in

Microsoft (NASDAQ:MSFT) had an outstanding quarter, but it was not enough to spur the market to rally. The takeaway from the post-release action is that AI is priced into the market, and the stock may not reach new highs this year.

The AI hype plays into Microsoft’s standing as a Top-Rated, Most Upgraded, and Most Searched/Followed Stock on the Marketbeat.com platform, factors that pushed the stock to its current highs. Even the analysts front-run market, opening the door to downward revisions this quarter.

Thirty-five analysts have Microsoft pegged at a consensus of Moderate Buy with a price target trending strongly higher. The most recent targets are well above the current price action, consistent with the broad consensus.

This could lead the market to new highs, but it will take more conviction from the analyst community. The market should follow if they come out reiterating current above-consensus targets or even raising them.

If not, the analysts may cap gains in the market until later in the year. If they lower their targets, shares of MSFT will fall further. In this scenario, Microsoft will return to more attractive levels, presenting a better bargain and yield.

Microsoft stock trades at 32X earnings, consistent with other mega-tech like Apple (NASDAQ:AAPL), but it only pays about 0.77% in yield. Investors looking for growth may be stymied by the valuation, which is no attraction for income investors.

The bottom line is that Microsoft’s stellar quarter, good as it was, was nothing more than what the market was secretly hoping for, and the guidance might not be enough to keep the bulls running.

Microsoft had an outstanding quarter with revenue of $56.2 billion, up 8.3% compared to last year. The gains were driven by strength in most segments and outperformed the Marketbeat.com consensus estimate by $0.710 billion or 130 basis points.

Intelligent Cloud was the strongest performing segment, with a gain of 15% underpinned by a 26% increase in Azure Cloud. Product and Business Processes grew by 10% while More Personal Computing fell by 4.0%.

The margin news is also good, with GAAP earnings outpacing the top-line strength by 400 basis points. The GAAP earnings were reported at $2.69 or up 20% YOY and 540 bps better than expected. The factor weighing on the market most heavily is guidance. The company is guiding for systemwide growth and strength in AI and cloud, but nothing more than was expected.

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The news failed to inspire any analyst commentary in the first 12 hours after the report, suggesting they are rethinking their targets. If the good news were actually "good," the analysts would be gushing.

The institutions own a lot of Microsoft, about 73%, so they are a force to be reckoned with. They’ve been buying on balance for the last year at a pace of more than 2:1, but a shift in the activity suggests a top could be in play. Institutional activity spiked in Q1 when shares were confirming a bottom at a long-term low, and it has slacked off since.

The Q3 activity is bearish on balance and suggests profit-taking has begun within the group. If this continues, MSFT shares will have difficulty moving higher.

The post-release price action is not favorable to higher share prices. The market is down 3.5% in premarket action and could move lower. The correction could take the stock to $320 or lower if the market does not regain traction soon. That is consistent with the long-term EMA. MSFT could be in for a much bigger decline if that fails as support.