Select Page

Back on March 24, I added shares of Microsoft (MSFT) to my Volatility Portfolio on my subscription site on the thinking that in a quarter when earnings were projected to be down for the Standard & Poor’s 500 as a whole, reliable technology growth stocks such as Microsoft would outperform. Plus, I figured, with worries about a Recession increasing, reliable Big Tech growth stocks would get a premium.

Yesterday, Microsoft delivered the strong earnings story. And today the market is delivering the reward. As of 11:30 a.m. New York time Microsoft shares were up 7.83% to $296.99.

So today, I’m selling the Volatility Portfolio position I added on March 24 with a 6.15% gain. In the short term, which is where the Volatility Portfolio is positioned, I think the stock is likely to slump with the market from current levels.

I continue to hold the stock in my long-term 50 Stocks Portfolio. That position is down 2.03% from my purchase date of January 18, 2022. And in my 12-18 month Jubak Picks Portfolio where the shares were up 193.32% since June 14, 2018. I’m keeping my $352 target price for that position.

Yesterday, Tuesday, April 25, after the market close, Microsoft reported fiscal third-quarter earnings of $2.45 a share. Analysts were expecting earnings of $2.24 a share. Revenue came in at $52.9 billion. Analysts had been looking for $51 billion in revenue. Year over year Microsoft earnings were up 10% and revenue rose 7%.

For the current quarter, Microsoft forecast revenue of $54.85 billion to $55.85 billion. The midpoint of $55.35 billion is above Wall Street’s consensus target of $54.7 billion for the June quarter.

Microsoft trades at a trailing 12-month price-to-earnings ratio of 32.67.

The driver this quarter, again, was the company’s cloud unit. Microsoft Cloud sales surged 22% to $28.5 billion in the March quarter. That 22% growth, however, continues a pattern of gradually moderating growth for the cloud unit.

Some of the enthusiasm today on the shares comes from evidence (scant thought it may be) that the company is seeing benefits from its investment in AI. (Artificial intelligence remains one of Wall Street’s favorite enthusiasms.)

Revenue for Azure, the company’s cloud software platform, is expected to grow between 26% to 27% in the current quarter. That includes roughly one percentage point from AI services, Chief Financial Officer Amy Hood said on the company’s earnings call. Microsoft’s Azure OpenAI service now has 2,500 customers, including Shell and Mercedes-Benz, up tenfold in the last quarter, CEO Satya Nadella said. The company’s Bing search engine, which has recently incorporated OpenAI’s ChatGPT, is also gaining market share.

Here are some examples of Wall Street’s AI enthusiasm. D A Davidson analyst Gil Luria said the company’s AI growth was “highly encouraging given the very early stages of adoption.” He hiked his price target to $350 from $325.

“Microsoft’s purposeful AI moves have left competitors scrambling to respond,” Oppenheimer analyst Timothy Horan said. The company looks “structurally advantaged” for the next computing wave, with its Azure, OpenAI, and Windows software, he added. He raised his price target on the stock to $330 from $310.

RBC Capital Markets analysts also raised their price target to $350 from $285 following the earnings. They said the percentage point from AI services included in the Azure guidance “could be understated.” “Stepping back, while near-term remains challenged by macro, not unique to Microsoft, a clear path to reaccelerating cloud (and overall) is fast forming with AI,” those analysts said.

One element of today’s good news on earnings and stock performance from Microsoft that worries me about the overall market: With roughly one-third of the S&P 500 companies announcing quarterly earnings results this week, four Big Tech companies–Alphabet (GOOGL), (AMZN), Microsoft (MSFT), and Meta Platforms (META)–account for 41% of the S&P 500’s 2023 year-to-date gain, according to Nicholas Colas, co-founder of DataTrek Research.

If you add in Apple (AAPL), which reports next week, Nvidia (NVDA), and Tesla (TSLA), these seven tech giants account for 86% of the S&P 500’s 2023 gain, according to Colas, The S&P 500’s gain for 2023 was 7.7% through the April 24 close.

Can’t say that I like narrow markets or narrow rallies much.