We are now into the third-quarter earnings season. It hasn’t been a pleasant start, as bank earnings have failed to impress. The wavering artificial intelligence (AI) trade isn't helping, with chipmakers and hyperscalers weighing on the market this week.
Microsoft to Release Earnings on October 28
Markets would face their next major test when tech giants report their quarterly results later this month. Specifically, Microsoft (MSFT) will release its fiscal Q1 2027 earnings on Oct. 28. Last quarter, the company’s earnings blew past estimates, which, coupled with the reassuring commentary on capex, triggered a monstrous post-earnings rally. The stock rose the most among its Magnificent 7 peers following the June quarter earnings release, and subsequently built on those gains to rise nearly 38% in Q3. While comparisons with the dot-com days can be scary, it was the best quarter for the Satya Nadella-led company since 1998.
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On Tuesday, Microsoft closed at a record high and reclaimed its $4 trillion market cap. However, despite the sharp gains in Q3, MSFT stock is up just about 10% this year, which is below the S&P 500 Index ($SPX), let alone beating the tech-heavy Nasdaq 100 Index ($IUXX), which is up almost 19% for the year thanks to sharp gains in chip names.
With Microsoft set to report its fiscal Q1 earnings, let’s explore whether the stock can have yet another stellar rally following the confessional.
www.barchart.comMSFT Fiscal Q1 Earnings Estimates
Analysts expect Microsoft’s fiscal Q1 revenues to rise 16.8% year-over-year (YoY) to $90.7 billion, a slight deceleration from the 17.7% growth it reported in the previous quarter. The estimates are in line with Microsoft’s guidance, which called for revenues between $89.85 billion and $90.95 billion.
Microsoft’s earnings per share (EPS) is expected to rise 14% to $4.71 in the quarter. Markets would particularly watch the growth in Azure. The segment’s revenues rose 43% last quarter, well ahead of estimates, and the company has guided for 45% growth this quarter. As is the case with fellow cloud companies, investors won’t merely expect a beat, but a significant one along with rosy guidance for the current quarter.
Microsoft’s cloud remaining performance obligations (RPOs) would also be closely watched. The company guided for “healthy growth on a growing expiry base” while warning about “some quarterly volatility in both bookings and RPO growth rates” due to the major contracts it signed with OpenAI in the corresponding quarter last year.
Microsoft Stock Forecast
Analysts are bullish on Microsoft heading into earnings, and earlier this month Wells Fargo raised the stock’s target price to a Street-high of $725 while adding the stock to its Q4 “Tactical Ideas List.” Jefferies raised MSFT’s target price from $575 to $650 while Barclays raised its target price from $512 to $600. Melius Research upgraded Microsoft from a “Hold” to “Buy,” assigning a target price of $665.
www.barchart.comShould You Buy MSFT Stock Heading into Q1 Earnings?
While sell-side analysts are upbeat on the company ahead of the Q1 earnings, I don’t expect a sharp rally in Microsoft stock following the report. First, the stock has already seen a re-rating after the Q3 rally, and its forward price-to-earnings (P/E) has expanded to 27.5x. These are still not exorbitant numbers for a quality tech name like MSFT, but the margin of safety is quite low at these levels. Also, in the previous earnings, Microsoft went into the earnings report as an underdog amid concerns over AI monetization and software disruption, which raised the probability of a post-earnings rally. This time around, markets have big expectations for the company, much of which is priced in after sending the stock to a record closing high. Elevated expectations and rich valuations lower the odds of a post-earnings rally, at least to the extent we saw following the Q4 report.
While I have been bullish on MSFT this year, I believe the re-rating story has largely run its course and am therefore wary of adding more shares before the earnings. On the contrary, I would use any further rise in MSFT to take some profits off the table.
On the date of publication, Mohit Oberoi had a position in: MSFT . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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