Microsoft Q3 earnings preview: OpenAI elevates tech ambitions

When will Microsoft report its latest earnings?

Microsoft Corporation is scheduled to report its third quarter (Q3) earnings after the market closes on Friday, 26 April at 4.05am SGT (GMT +8).

Forecast bright for Microsoft's Intelligent Cloud in Q3

As demonstrated in Microsoft's recent reports, cloud services remain the crown jewel, driving 'Intelligent Cloud' revenue to $25.88 billion in Q2, up 20% year-over-year, and contributing to more than 40% of the group's total revenue. This momentum is expected to continue in Q3 as Microsoft projects revenue from this segment to grow to $26–$26.3 billion,

Microsoft's Q3 unpacked: slower revenues but stronger EPS

Revenue growth slows down

• Current Quarter (Q3 2023): $60.86 billion (expected)
• Previous Quarter (Q2 2023): $61.13 billion

EPS shows improvement

• Estimated EPS Q3 2023: $2.84
• EPS Q2 2023: $2.77

Year-over-year performance

• Q3 2023 revenue growth (year-over-year): 19% (expected)
• Q3 2023 EPS growth (year-over-year): 27% (estimated)

Microsoft's fiscal outlook for Q3 2024

Microsoft is preparing for modest yet strategic growth in the upcoming fiscal year 2024 Q3. Investors and stakeholders might anticipate a marginal uplift of less than 1 percentage point across all operational segments, with no significant alterations to the existing cost framework. This aims to maintain stable operational expenses and the cost of goods sold (COGS).

Detailed financial projections

• Revenue: predicted to range from $19.3 billion to $19.6 billion.
  
• Cost of Goods Sold (COGS): foreseen to fall between $18.6 billion and $18.8 billion. This includes an estimated $0.7 billion in amortisation expenses tied to the acquisition of intangible assets from Activision.
  
• Operating expenses: anticipated to be in the vicinity of $15.8 billion to $15.9 billion. This price encompasses costs associated with purchase accounting adjustments amounting to approximately $0.3 billion and costs accruing from the integration and transaction expenses related to the Activision acquisition.

Forging the future: Microsoft and OpenAI's groundbreaking partnership

Microsoft's cloud sector is currently its most shining asset, but the buzz and anticipation mainly circle around its upcoming advancements in artificial intelligence (AI). As the most highly valued corporation globally, Microsoft's strides in AI are under intense observation.

Following its substantial investment in OpenAI, Microsoft has strategically focused on weaving AI capabilities throughout its technological ecosystem. With ChatGPT rapidly becoming well-known, investors with a bullish outlook are keenly awaiting Microsoft's further integration of AI and future strategic initiatives that leverage its forefront position in the AI domain.

Microsoft's response to declining revenues

On the other side, a notable underperformance in Microsoft's portfolio is observed in the revenues from its devices and Office commercial products, which saw declines of 9% and 17% respectively in the last quarter. This downturn is attributed to weakened demand in the PC market, leading to an anticipation of a continued low double-digit decline in these areas for Q3.

Trading Microsoft's shares

The prevailing risk-averse sentiment since the beginning of Q2 has effectively halted the ascending journey for Microsoft's stock prices, which surged by 38% from October 23 to March 2024. At the time of writing, the tech giant's share prices have declined more than 6% from its all-time high of $427.

Despite the recent pullback, TipRanks awards MSFT an 'outperform' smart score, with 32 out of 34 analysts recommending a buy in the past three months.

IG client sentiment consensus

Microsoft technical analysis

Looking at the daily chart, the price has experienced two significant breakouts recently, signalling that a further downtrend could be in the cards, including breaching the months-long ascending trendline and breaking below the 100-day moving average for the first time in 2024. Furthermore, the RSI has also fallen to its lowest level since November, underscoring the bearish momentum at the moment.

Technically, any further downtrend will find imminent support in the $379-$382 zone, where the 23.6% Fibonacci retracement and the previous high converge. A break below this support could open the door to challenge the crucial 200-day SMA, unbroken for over a year. On the other hand, the first upside target could be eyed at $415, where the 50-day SMA is situated.

Microsoft daily chart

• ^{Risk warning: the figures stated are as of 23 April 2024. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}