After UBS Group AG downgraded the stock, Microsoft Corp. shares dropped to their lowest level since November, fueling worries about the company’s cloud computing division, which has long been a major source of revenue.
The stock experienced its largest intraday decrease since October on Wednesday, falling as much as 5.7%. The decline comes after a 29% decline in 2022, the software giant’s largest yearly decline since 2008, when the Federal Reserve increased borrowing prices to fight rising inflation.
UBS wrote that Azure, the cloud computing business it described as the company’s growth engine, “is entering a steep growth deceleration that could prove to be worse in FY23/FY24 than investors are modeling.” The business “may be slowing due to maturation, not just a tough macro,” the bank wrote.
Microsoft provided a dismal prediction for Azure sales growth in its most recent quarterly results, which were published in October. As a result, analysts have started lowering their forecasts. According to statistics gathered by Bloomberg, the consensus for adjusted 2023 earnings per share has decreased 5.6% over the previous three months, while the outlook for sales has decreased 3.7%.
The stock is trading at a little discount to its 10-year average of 22.8, or 21.8 times projected profits. The valuation “feels fair, not cheap,” according to UBS, which reduced its price objective from $300 to $250.
The Fed’s tightening of policy put pressure on multiples, which led to broad pressure on tech equities last year. Concern over a decrease in company spending is now being heightened by the recession’s mounting danger. Additionally, Salesforce Inc., an enterprise software provider, announced it will eliminate roughly 8,000 jobs and reduce its real estate footprint due to a decrease in the spending habits of its corporate clients.
During the epidemic, companies like Microsoft and Salesforce switched to remote work, which increased demand for PCs and cloud services like collaboration software. However, as economic development has slowed, it has become hard to maintain that growth rate. Despite these reservations, Microsoft is still a Wall Street favourite as over 90% of analysts whose recommendations are tracked by Bloomberg have a buy rating for the stock and none have a sell rating.
Although the average analyst price target has dropped by around 11% since the end of September to about $293, it still suggests a gain of almost 30% from the present level.
