Microsoft (MSFT) Earnings Preview: More disappointment likely as strong dollar and slowdowns hit forecasts

Microsoft (MSFT) releases earnings after the close on Tuesday in what is shaping up to be a make-or-break week for the stock market. 

Microsoft earnings

Microsoft is expected to post earnings per share (EPS) of $2.29 and revenue of $52.4 billion. This compares with the previous quarter's EPS of $2.22 and revenue of $49.36 billion. As ever the focus will be on forward guidance and in particular concerns over the rising dollar. In May Microsoft said it was slowing hiring, and in early June the firm warned about the impact of the strong dollar on its quarterly earnings. The hiring freeze is being felt by many in the tech industry as concerns grow over rising interest rates. Last week Bloomberg reported that the Microsoft Azure cloud segment has cut many job openings, which is significant. Azure is the driver of recent profitability and accounts for nearly 40% of Microsoft's revenue at the moment. 

See our recent analysis: Microsoft Stock Deep Dive: Price target at $230 with near-term risks due to strong US dollar (fxstreet.com)

Microsoft price target

Wall Street remains highly optimistic about Microsoft with an average price target of $347.61. We expect multiple downgrades post-earnings. Given that the bar has already been lowered by Microsoft, we expect earnings to be in line or perhaps feature a small beat. Outlook will be bearish however, which will drive share price movement.

Microsoft stock forecast

When Microsoft warned of the effects of the strong dollar in early June, the dollar index was trading at 102. Now it is at 106 but reached 109 in mid-July. This effect is only getting worse for Microsoft. Despite this warning, MSFT shares did not move substantially. We expect the company to lower guidance for the remainder of the year based on the strong dollar but also based on slowing growth in its cloud business. This has been a key growth driver for Microsoft over the past few years, but commentary from others in the cloud space has been decidedly bearish. Microsoft shares are unchanged since that early June warning. That warning is likely to be paid forward and so sets the stock up for another bearish tilt at $240. Selling volatility is our favored play ahead of earnings as volatility is always marked up in advance of earnings. This is a high-risk strategy for highly experienced traders only.

MSFT weekly chart