microsoft stock

Microsoft stock is trading higher in US premarket price action today. The company released its fiscal fourth quarter 2022 earnings yesterday after the markets closed. While it missed on both the topline and the bottomline estimates, it provided upbeat guidance which cheered investors.

Microsoft’s earnings have come at a time when there are heightened concerns over a recession in the US. Walmart provided a grim commentary on its sales outlook and said that rising inflation is taking a toll on the sales of discretionary products, especially clothing. The company’s warning triggered a sell-off in other retail and e-commerce stocks including Amazon.

Coming back to Microsoft’s earnings, the company’s revenues increased 12% YoY to $51.9 billion. It suffered a four-percentage point hit from a stronger US dollar. As the US dollar has appreciated against most currencies, multinational US companies are facing currency headwinds. Nonetheless, Microsoft’s revenues fell slightly short of the $52.44 billion that analysts were expecting.

Microsoft posted an adjusted EPS of $2.23 which was below the $2.29 that analysts were expecting. The company’s net income rose 2% in the quarter. After adjusting for the currency headwinds, the company’s net income rose 7%.

Commenting on the earnings, the company’s CEO Satya Nadella said, “We see real opportunity to help every customer in every industry use digital technology to overcome today’s challenges and emerge stronger.” He added, “No company is better positioned than Microsoft to help organizations deliver on their digital imperative – so they can do more with less.”

Notably, Microsoft is among the companies that benefited from the digital transformation whose pace got fast-tracked amid the COVID-19 pandemic. Now, as the pandemic growth has faded away, Microsoft’s sales growth is also tapering down.

Microsoft Provides Strong Guidance, Markets are Impressed

Meanwhile, while Microsoft missed both topline and bottomline estimates, the company provided upbeat guidance which impressed markets. It expects revenues and operating income to rise in double digits in the fiscal year 2023. The company reiterated its guidance provided during the previous earnings call. Nonetheless, the guidance looks impressive given the deterioration in the economy over the last three months.

Several US companies including Microsoft have laid off employees amid the slowing growth. Yesterday, Shopify also joined the long list of tech companies that are laying off employees and said that it would cut its headcount by 10%.

For the first quarter of the fiscal year 2023, Microsoft projected revenues of $49.25 billion-$50.25 billion, which implies a YoY growth of 10% at the midpoint. The guidance was however lower than what analysts were expecting.

Sales of smartphones and PCs are expected to fall in 2022. Micron expects global smartphone volumes to fall 5% in 2022. The company also said that PC sales might plummet 10% in the year and also warned PC makers would “adjust” their inventory levels in the back half of the year. The company is also adjusting its production amid the slowing demand.

Meanwhile, another positive aspect of Microsoft’s earnings was the continued growth in its cloud business. The company’s cloud revenues increased sharply in the quarter and it managed to increase its market share in the quarter.

Wall Street Analysts are Bullish on MSFT after the Earnings

Wall Street analysts are bullish on MSFT stock after the earnings. Morgan Stanley reiterated its overweight rating and said, “While macro impacts were certainly evident in Q4, the 35% YoY cc growth in Commercial bookings highlights strong value proposition and solid secular positioning, while sustained guidance for double-digit operating income growth illustrates a steady hand at the helm.”

Among other brokerages, William Blair, Evercore ISI, Credit Suisse, Barclays, and Piper Sandler also maintained their overweight rating and advised investors to buy Microsoft stock.

This week, we have a flurry of economic indicators and earnings including the Federal Reserve’s meeting. The US Q2 GDP report is also scheduled for tomorrow which would provide insights into the health of the world’s largest economy.

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