Microsoft’s (NASDAQ: MSFT) share price is driven by its growing position in the cloud. Late to the game, Microsoft has leaned hard into cloud and cloud services and AI, gaining share from Amazon Web Services, Google, Alibaba and others. The stock price is pulling back following the Q4 results, suggesting a top is in play, but investors should not be so quick to shed their shares.
The Q4 results did not spark a rally for this tech stock or a massive correction. The pullback in the action is a healthy consolidation of gains made over the last year, with more gains to come. The technical outlook for Microsoft is robust and suggests a move to $450 is coming.
The technical action in MSFT is very telling. The market hit bottom late in 2022, reversed in January 2023 as the cloud and AI began to gain momentum and then broke to new highs late in 2023. In between, the market created a very prominent Bullish Flag Pattern that brings some interesting targets into play.
The initial 2023 rally took the stock from the bottom of a trading range to its top for a move of $110 or 45%. The Flag Pattern is a continuation signal confirmed by new highs set later in the year, which brings targets of $450 to $490 into play. $110 plus $340 (the breakout point of the Flag Pattern) equals $450, and $340 plus 45% is $493.
What could drive Microsoft to new heights?
AI is what will drive Microsoft to new heights. The company is embedding AI/copilot across its technology stack and is seen to be in the earliest innings of a long game. However, the company is firing on all cylinders with strength in all primary operating segments during Q4.
The company reported $62.02 billion in net revenue, led by a 20% gain in Intelligent Cloud, to outpace the analysts’ consensus by 150 basis points. IC is driven by a 24% gain in cloud services and a 30% increase in Azure, the company’s cloud platform and home to its AI models. More Personal Computing advanced by 18%, including the impact of Activision-Blizzard and Product & Business services advanced by 13%.
The margin news is also favorable, with gross and operating margins above the consensus figures. Margin is aided by internal efficiencies aided by AI and revenue leverage attributed to the cloud and AI. The net result is a 33% increase in operating and net income, a 33% increase in GAAP earnings and a 26% gain in adjusted earnings.
Guidance is also favorable to higher share prices. The company guided Q1 to a seasonally expected sequential decline but up 13% YOY and above the analysts' consensus forecast. The guidance is also potentially cautious, given the trend in business spending. If ten companies buy NVIDIA and AMD accelerators to build cloud infrastructure, another 1,000 seek the cloud for its utility, and Microsoft is a clear leader in cloud services.
Analysts are driving Microsoft higher
The analyst activity in MSFT is robust and driving the market higher. The response post-release is as bullish as it has been for the last 12 months and is likely to continue doing so. Wedbush analyst Dan Ives called the results a “masterpiece” and sees the company in the earliest innings of the AI revolution. Wedbush’s target is $450, shy of the $475 high target set by Tigress Financial, but both align with the technical projections. The only caveat is that the current consensus aligns with the recent price action and may provide a near-term hurdle.
The critical resistance now is near $410 and the all-time closing high. If this market can move above there soon, it will likely continue to rally in H1 2024. If not, the market is overdue for a consolidation and may enter one now. The risk is that price action will sell off to firmer support levels, a scenario that will provide a better entry point for new money.
