Microsoft’s Stock Falls After Downgrade Cites Cloud-Growth Concerns
- UBS Predicts ‘Steep Growth Deceleration’ for Microsoft Azure Business
- Microsoft Shares Experience Largest Annual Drop Since 2008
Microsoft Stock (NASDAQ: MSFT) fell to their lowest level in over three months after UBS Group downgraded the stock, causing investors to become more concerned about the company’s cloud computing business, which has been a significant source of revenue for Microsoft in recent years.
Microsoft’s stock fell 6.2% on Wednesday, the largest one-day percentage decline since October. This followed a 29% drop in the stock price in 2022, the largest annual decline for the company since 2008, as the Federal Reserve raised borrowing costs to address rising inflation.
According to UBS, Microsoft’s cloud computing business, Azure, which the bank referred to as the company’s growth engine, is experiencing a significant slowdown in growth that could be worse than investors are anticipating in the next two fiscal years. UBS added that the slowdown in Azure’s growth “may be due to maturation, not just a challenging macroeconomic environment.”
In October, Microsoft released its most recent quarterly results, which included a disappointing forecast for Azure sales growth. As a result, analysts have revised their expectations downward. According to data compiled by Bloomberg, the consensus for adjusted earnings per share for 2023 has fallen 5.6% in the past three months, while the forecast for revenue has declined 3.7%.
Microsoft Stock Fair Pricing, Not Cheap
According to UBS, the stock’s valuation of 22 times estimated earnings, which is equal to its 10-year average, is “fair, not cheap.” As a result, the bank lowered its price target for the stock to $250 from $300. The Nasdaq 100 Index has a multiple of 20.
Tech stocks faced significant challenges in the previous year due to the Federal Reserve’s tightening of monetary policy, which affected valuations. Now, the increasing risk of a recession is raising concerns about a slowdown in business spending.
On Wednesday, enterprise software company Salesforce announced that it would eliminate about 8,000 jobs and reduce its real estate holdings as its corporate customers have become more cautious in their spending.
During the pandemic, both Microsoft and Salesforce, among other businesses, shifted to remote work, leading to increased demand for PCs and cloud applications such as collaboration software. However, as economic growth has slowed, the rate of this growth has become unsustainable
Despite these concerns, Microsoft remains a popular choice among analysts on Wall Street, with more than 90% of analysts tracked by Bloomberg recommending the stock and none having a sell rating.
Although the average analyst price target for Microsoft has decreased by about 11% since the end of September, to around $293, it still suggests that the stock has potential for a gain of almost 30% from its current level.
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