Microsoft construct bullish momentum

Summary

• Microsoft’s consistent revenue growth over the past decade is indicative of the company’s financial strength.

• Microsoft’s acquisition of AI-powered services provides a future competitive advantage.

• The expansion of the gaming industry indicates future expansion opportunities for Microsoft.

• The share price decline of 38.56% hits the apex of strong support on the monthly and weekly charts, indicating a strong buying opportunity.

Microsoft Corporation (MSFT) is a multinational technology company specializing in the development, licensing, and sale of computer software, consumer electronics, personal computers, and related services. Microsoft, with a market capitalization of $1.84 trillion, is considered one of the elite blue-chip stocks due to its history of strong financial performance, a diverse array of products and services, and powerful brand. The company has a history of generating consistent revenue and paying consistent dividends to shareholders. The annual revenue growth for 2022 is 17.95%, compared to the previous year, as a result of the strong demand for products and the rising demand for cloud systems and gaming.

Microsoft’s business strategy is the continuous acquisition of competitive technologies and companies. This keeps the company strategically competitive in the market. The share price declined by 38.56% from a peak of $346.42 to a low of $212.83 despite a very strong financial performance. The recent price decline is caused by the expectation of a global economic recession. This affected the stock market as a whole. Due to strong double bottom and ascending broadening wedge formation, however, this drop in Microsoft stock is viewed as an excellent buying opportunity for long-term investors. The monthly chart also provides support at the 38.20% retracement of the most recent parabolic move. Whereas the weekly chart provides support at the 200-week moving average.

This article discusses Microsoft’s financial and technical performance in terms of revenue, opportunities for future market growth, market risks, and price action. Strong financial growth, market demand for cloud services and gaming, future market expansion in Artificial Intelligence (AI) and the Internet of Things (IoT), and strong price action indicate that Microsoft is at the ideal level to invest for the future.

Earning analysis

The revenue for the second fiscal quarter of 2023 for Microsoft Corporation is $52.75 billion. This is an increase of 5.25% compared to the previous quarter. The revenue for the first quarter of 2023 was 3.37% lower as compared to the last quarter of 2022. However, the overall revenue is positive for the year 2023. During the past decade, the overall annual revenue increased at a consistent rate. The overall revenue increased by 14.02% in 2019, 13.65% in 2020, 17.52% in 2021, and 17.95% in 2022.

Financial stability

Microsoft’s consistently rising revenue indicates the company’s strength and higher profits, which is a positive sign for investors. The company’s consistently high revenue growth indicates that the company is obtaining market share from competitors. This is an indication of robust business growth. The company has acquired numerous companies, such as Linkedin, GitHub, Affirmed Network, ZeniMax Media, and Nuance Communications. Microsoft’s largest acquisition, however, is its $68.7 billion cash investment in Activision Blizzard, the world’s largest gaming company.

Microsoft’s share price and demand are boosted by the company’s consistently high revenue from a variety of Microsoft products. This indicates future growth potential. The majority of its revenue is derived from the Intelligent Cloud segment, which consists of server products and cloud services. According to Microsoft’s recent earnings announcements, the company is projected to generate $11.06 in EPS next year. This represents a 19% increase year over year. Consistently rising revenues contribute to the company’s profitability, which in turn increases product demand and the share price.

Microsoft future growth

As more businesses relocate operations online, demand for cloud computing services is anticipated to increase in the future. Microsoft’s Azure platform is a major player in the cloud market. The company is expected to experience continued expansion in this area. Cloud services have experienced dramatic growth over the past five years, but this growth is just the beginning; cloud services have a great deal of future growth potential due to the acceleration of digital transformation.

Investment in AI

Microsoft’s investments in AI research and development, including its acquisition of OpenAI, position it to capitalize on the growing market for AI-powered products and services as AI becomes increasingly integrated into businesses and industries. In my opinion, Microsoft will utilize the technology to enhance its own products and services, such as Azure, Office, and Dynamics 365. Consequently, the integration of ChatGPT can add superior capabilities to Microsoft products, thereby enhancing the competitive advantage.

IoT growth

IoT is also projected to grow significantly over the next few years, presenting Microsoft with a substantial growth opportunity. Microsoft’s Azure IoT platform is a comprehensive collection of IoT tools and services. This enables businesses to connect, monitor and manage IoT devices. Microsoft’s Azure IoT platform expands substantially as demand for IoT solutions increases. Edge computing, on the other hand, is also demanding. As more businesses adopt IoT devices, it is anticipated that the demand for edge computing solutions will increase. Microsoft’s Azure IoT Edge enables developers to run IoT workloads on-premises or at the edge. This provides an excellent business opportunity. Similarly, IoT technology is used to improve the efficiency and sustainability of urban areas, such as by managing energy consumption and traffic flow. Microsoft is currently engaged in multiple smart city projects that can be expanded in the future.

Gaming products

Microsoft’s gaming products are expected to contribute significantly to its future expansion. Xbox gaming console and the sale of games and gaming-related content for the console, such as downloadable game content, subscriptions, and in-game purchases, account for the majority of Microsoft’s gaming revenue. The company also generates revenue through the Xbox Game Pass and Microsoft Store by selling PC games and gaming-related content. Microsoft is also investing in gaming streaming services, which enable users to play Xbox games on a variety of devices. This includes smartphones and tablets and contributes to the company’s gaming revenue.

Microsoft’s gaming revenue is represented in the chart below. The chart reveals that gaming revenue has a positive pattern, indicating future growth opportunities. Microsoft generated approximately $4.76 billion in the gaming segment, which includes Xbox hardware and services, Xbox Live, and video games. Despite a slight decline in the Xbox gaming revenue, the patterns are positive. 

Microsoft Gaming Revenue (statista.com)

Microsoft constructing bullish momentum

The price action for the share price of Microsoft can be observed on the monthly chart below. The price decline of 38.56% hits the ascending broadening wedge at $218 support. The consolidation at the support region is an indication of a strong future recovery. Price action remains strongly bullish based on the November 2022 bullish candle. This was a perfect bullish hammer at the wedge support line. While the month of January 2023 retests to the support line and emerges a double bottom. Therefore, the likelihood of a future price increase in Microsoft stock increases. The Relative Strength Index (RSI) is also trading at approximately a 48 level, which is slightly below the 50 levels. Based on the chart below, Microsoft emerges bottom, when the RSI is below 50 as seen in the price action of November 2012, June 2010, and May 2006.

MSFT monthly chart (stockcharts.com)

The emergence of ascending broadening wedge patterns is due to the battle between buyers and sellers. The buyers push the share price up to new highs while the sellers push the price down. This results in a wide trading range with the price fluctuating between series of higher lows and higher highs. This happens due to the high uncertainty in last year due to Covid-19, higher inflation, and monetary policies. In 2019, ascending broadening patterns emerged on the price chart, indicating a price increase. After Covid-19, the momentum increased, indicating that the demand for Microsoft is increasing and buyers are willing to pay higher prices.

Strong technical support

The monthly chart below also reveals the strength of current levels. It is evident that Microsoft’s share price remained unchanged from 2000 to 2009. In contrast, a massive bull market began in 2009, pushing Microsoft’s share price from $11.19 to $346.42, an increase of approximately 2995% over the course of 12 years. However, it is very interesting to note that the majority of its movement occurred after Covid-19, resulting in a price increase of approximately $200 in less than two years. The progression from 2009 to 2021 was parabolic. Within this parabolic movement, the price has been corrected to a 23.6% retracement in preparation for an upward movement. This time, however, the share price has corrected by 38.20%, which is a significant buy signal for investors.

MSFT monthly chart (stockcharts.com)

Microsoft on weekly chart

The above discussion can also be simplified by looking into the weekly chart of Microsoft below. The share price is rebounding from the 200-week. The fact that the price is trading above the 200-week moving average indicates that Microsoft is in a powerful bull trend. At the 200-week moving average, the price is currently developing a double bottom, indicating that Microsoft is currently at a long-term buying point. The chart below also depicts fluctuations of the RSI above 30, indicating that the trend is strengthening. The double bottom will be confirmed if the share price breaks above $265; therefore, the current level is regarded as a strong buying opportunity for investors.

MSFT weekly chart (stockcharts.com)

Market risk

Despite strong financial stability, Microsoft faces market risk from the global economic recession, which is affecting the stock market as a whole. The company also faces strong competition from other technology companies such as Apple and Google. Microsoft’s market share and revenue are negatively impacted by the introduction of new products and services by its competitors.

Microsoft is impacted by the decline in worldwide PC shipments, which decreased by 28.5% in 2022. This decline is the largest since the 1990s and is a result of the expectation of a global recession, higher inflation, and higher interest rates. Due to rising inflation, there is a lack of affordability, which reduces the motivation to purchase a new PC, resulting in the lowest level in years. A decline in worldwide PC shipments has a negative impact on Microsoft’s stock price because a significant portion of the company’s revenue is generated from the sale of the Windows operating system, which is primarily used on personal computers.

If there is a decrease in demand for PCs, there will be a decrease in demand for the Windows operating system, which will have a negative effect on Microsoft’s financial performance. In addition, a decline in PC shipments indicates a shift in consumer preferences toward mobile devices and cloud-based services, which also has a negative impact on Microsoft’s financial performance. Consequently, investors may become more cautious about future prospects, resulting in a decline in the share price.

Even though strong support at the ascending broadening wedge and a perfect bottom at the support indicates a strong indication for higher prices, there is a risk of a major breakdown in the market, if the price breaks below $210. The risk will only develop if Microsoft’s share price falls below $210, which will break the ascending broadening wedge to the downside. Therefore, investors can use the $210 level as the major break in the market.

Final words

On the basis of fundamental and technical analysis, it is observed that Microsoft is a strategically and financially sound investment option, and its recent price decline due to the economic downturn is an excellent investment opportunity for long-term investors. Microsoft’s acquisition of market share in AI research and development is a fantastic deal with great potential for growth in the future. The incorporation of OpenAI products will increase the market demand for Microsoft products. On the other hand, the demand for cloud computing services is increasing as more businesses transition to online operations, thereby boosting the demand for Microsoft’s intelligent cloud segment. Similarly, the demand for video games has increased since the release of Covid-19, as more people spend time at home playing games.

Microsoft’s gaming segment’s robust expansion increases the likelihood of overall future revenue growth. The recent share price decline has completed the price pattern at the apex of strong support, as discussed above. Price congestion and a double bottom in a strong region are also indicative of future price increases. Microsoft provides investors with an excellent opportunity to invest in stocks for future profits. However, a share price below $210 will increase the risk of a major breakdown in the market before the next advance.