Can AI help boost Microsoft's stock price as it faces a major financial report test?

After the U.S. stock market closes on July 25th, Microsoft will release its financial report for the fourth quarter of fiscal year 2023. Analysts generally expect Microsoft's Q4 revenue to be $55.48 billion and earnings per share to be $2.55. Several institutions have raised their target price for Microsoft, with the current average target price being $373, implying a potential upside of approximately 10% for Microsoft.

Microsoft will release its financial results for the fourth quarter and full fiscal year of FY23 (Microsoft's fiscal year runs from July 1 to June 30 of the following year) after the U.S. stock market closes on Tuesday this week.

The current market consensus is that Microsoft's revenue in the fourth quarter (April-June) is expected to grow by 6.9% YoY, showing a slight slowdown compared to the previous quarter. The expected earnings per share (EPS) are $2.55, indicating a significant improvement compared to the previous quarter.

Undoubtedly, Microsoft's cloud Azure and AI businesses are the highlights of this financial report. Azure is capitalizing on the market growth driven by the AI trend. Wolfe Research analyst Alex Zukin believes that Azure is projected to achieve a revenue growth of 27.5% this quarter, with a year-end YoY revenue growth rate reaching 30%.

In addition, the gradual commercialization of Office 365 Copilot and Bing Chat Enterprise is expected to contribute new sources of revenue growth. Last week, Microsoft announced that its new enterprise AI tool, Microsoft 365 Copilot, which is used in conjunction with Office software, will charge an additional service fee of $30 per user per month to enterprise customers. Citigroup analyst Tyler Radke believes that Microsoft Copilot has enormous potential and even with a penetration rate of just 5%, the product could generate at least $5 billion in incremental revenue for Office 365, close to half of last quarter's enterprise sales revenue from Office 365 ($9.4 billion).

However, the widespread commercial implementation of Office 365 Copilot and Bing Chat Enterprise is expected to occur after July 2023. Therefore, during this financial reporting season, it is more worthwhile to pay attention to the progress of the AI business and the company's performance guidance for the future.

Ahead of the earnings release, several institutions have raised their target price for Microsoft. Goldman Sachs analyst Kash Rangan increased the target price for Microsoft to $400. He believes that the potential market size in the AI-related field is as high as $135 billion, and Microsoft is a leader in that area, expecting to capture a market share of 15% to 30% by 2026.

Currently, the average target price from institutions for Microsoft is $373, indicating approximately 10% upside potential. Here are the latest target prices compiled from major banks:

Benefiting from the AI boom and expectations of a Fed rate cut, Microsoft's stock price has risen over 40% since the beginning of the year, with a PE ratio reaching 37 times, far exceeding the market average. If Microsoft fails to significantly improve its revenue guidance and growth expectations in this earnings report, its stock price may decline.

We believe that this Microsoft earnings report will meet expectations, but due to the high valuation, we predict limited upside potential for the stock price.

【Source: TradingView Microsoft PE ratio】

From a technical perspective, the Microsoft stock price has currently retraced from its high point and gradually approached the 21-day moving average. It is expected to make another attempt at the key level of $350 in the next move. Resistance is seen at $355, while support is observed at $336.

【Source：TradingView】