First-quarter earnings are starting to roll out, with some companies already reporting. However, we're just starting to get to the point where the big tech companies are releasing results, and their commentary on the business outlook for their core products and AI could really steer the market's direction.
One of the big players in this space is Microsoft (MSFT +2.20%), currently the world's second-largest company with a $2.76 trillion market capitalization at the time of writing. It reports on April 30, and with the stock down 20% from its all-time high, is it primed to rocket higher following its earnings release?
Understanding how its client base is doing will be the key
Although Microsoft has many product lines, the biggest one that investors focus on is its intelligent cloud division, which is headlined by its cloud computing product, Azure. Azure has been a steady grower for Microsoft, and it grew at a 31% pace last quarter, continuing a long-standing trend of this service growing in the 20% to 30% range.
Two tailwinds are pushing this division higher: AI and workload migration. AI is a huge boost for cloud computing providers because clients need somewhere to run these intense workloads, as most companies can't justify a supercomputer to train AI models that aren't used continuously. There is also a general migration to the cloud from on-premise computing. By running workloads on the cloud, clients eliminate a single point of failure that could occur on-site and don't have to worry about maintenance or their servers becoming outdated, which falls onto Microsoft's shoulders.
With intelligent cloud growing the quickest in Microsoft's last quarter, investors will monitor it to ensure that it continues growing. If there's no slip-up in revenue growth, investors may scoop up shares, as this will show that this division hasn't been affected by the economic outlook.
The same could be said for Microsoft's productivity and business processes division, which includes products like Microsoft 365 and LinkedIn's ad revenue. If clients are starting to pull in their spending, this division could see a poor outlook, which wouldn't bode well for the broader economy. However, if revenue comes in as expected and management gives superb guidance, this could be the turnaround announcement the tech sector needs to start ripping higher again.
Because most of these products are software instead of physical goods, they aren't subject to tariffs. However, the general economic threat of tariffs could weigh into a company's decision on whether to expand its usage of Microsoft products. This will be something to key in on during Microsoft's earnings announcement. But is there enough upside here that Microsoft's stock is worth buying today?
Microsoft's stock still isn't cheap despite the broad sell-off
Microsoft is trading at levels not seen since mid-2023 following the sell-off.
MSFT PE Ratio data by YCharts
However, in the broad scheme of the market, 30 times trailing earnings and 28 times forward earnings still isn't all that cheap. Microsoft has received a premium valuation for its steady execution and rock-solid product line, but I'm not sure it provides investors enough value to warrant picking up shares right now, as many of its peers are expected to grow faster over the next few months and have a lower valuation.
We'll see how Microsoft does, but there are just too many other bargain bin stocks in the market to warrant playing the guessing game with Microsoft's stock before its earnings announcement.
