As of late November 2023, the general state of the stock market, particularly on Wall Street, has shown a robust performance with tech stocks driving significant gains. The Dow Jones Industrial Average, Nasdaq Composite, and S&P 500 all closed firmly in the green, reflecting positive investor sentiment. The technology sector, in particular, has been a major contributor to these gains, with the Technology Select Sector advancing 1.5%.
Focusing on Microsoft (MSFT), the company has been at the forefront of this tech boom. Microsoft’s stock surged by 2.1%, driving the day’s gains and reaching a 52-week high, primarily due to the company’s strategic move in hiring Sam Altman, the recently ousted CEO of OpenAI. This decision was seen as a significant step in Microsoft’s advancement in artificial intelligence (AI), contributing to its rise in the stock market. The expectation of Microsoft leading a new advanced AI research team and bringing on board other OpenAI researchers has been received positively by the market.
Analysts have given Microsoft a Moderate Buy rating, with an average price target of $388.84, indicating a 3.02% upside potential. The high forecast for the stock reaches $450.00. However, there are some concerns. Despite Microsoft’s recent all-time high and strong performance, there are rising apprehensions about its future returns, with some analysts believing that the upside might already be factored into its valuation. This suggests a potential for limited upside, coupled with downside risks if future results don’t meet high expectations.
Additionally, macro uncertainties like high inflation and the risk of a recession continue to pose threats to the economy and the stock market, leading some investors and analysts to adopt a bearish view on Microsoft and other major tech stocks. These stocks, often referred to as the “Magnificent Seven,” are perceived to be in a bubble, with risks of a significant market correction if this bubble were to burst or deflate.
Despite these concerns, Microsoft’s strategic focus on integrating AI functionality into its products and services, as well as its partnership with OpenAI, positions it favourably for continued strong performance. This integration has already played a significant role in Microsoft’s impressive results in the last quarter. The company is expected to sustain its current valuation and potentially drive further gains for its shares. Sell-side analysts anticipate Microsoft’s earnings to rise by 16% for the fiscal year ending in June 2024, with similar growth expected in the following fiscal year. There is potential for even higher year-over-year earnings growth in FY2026, suggesting a strong outlook for Microsoft in the medium term.
In summary, while the stock market, especially the tech sector, is currently experiencing robust growth, investors and analysts are cautiously optimistic about Microsoft’s future performance. The company’s recent focus on AI and strong operating performance are key drivers of its current success, but macroeconomic factors and concerns about overvaluation present potential risks. The overall consensus, however, leans towards continued growth and a positive outlook for Microsoft in the near to medium term.
