As Doubts About a Recession Creep in, Microsoft's Stock Market Halo Fades

Some investors were disappointed when Microsoft Corp.’s cloud-computing business slowed down, as they had thought the software giant would be able to withstand a potential recession.
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The stock has not participated in the January rally in tech, and some analysts have become negative on it after years of overwhelmingly bullish ratings.
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Bears say that Microsoft's stock will not be a good investment until a slowdown or contraction is more fully priced in. Microsoft will give some clues as to how the business is doing when it reports quarterly earnings after the close on Tuesday.
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According to Timothy Ghriskey, senior portfolio strategist at Ingalls & Snyder, there could be better entry points ahead, especially if economic growth slows down. Ingalls & Snyder has about $7 billion in assets.
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Microsoft shares have outperformed the technology benchmark Nasdaq 100 Index in recent years, due in part to the company's reputation for being able to weather a weakening economy. However, faced with spending cutbacks by its corporate clients, Microsoft joined its peers last week in cutting jobs.
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John DiFucci, an analyst at Guggenheim, has given Microsoft a sell rating, the first in more than three years. He cited growth concerns at the company’s Windows and Azure cloud computing businesses. This follows UBS Group AG cutting its view on the stock, writing that Azure “is entering a steep growth deceleration that could prove to be worse in FY23/FY24 than investors are modeling.”
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The cloud operation is certainly growing rapidly, with double-digit revenue growth. However, this growth is slowing down at a time when investors are still expecting strong growth. This could be a problem for the company going forward.
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Analysts expect Azure sales to increase at a slower rate in the next few years, according to Bloomberg data. Microsoft warned in October that Azure sales would rise by about 37% for its fiscal second quarter that ended in December, down from a 42% rate in the prior three months.
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Microsoft's stock price has fallen 29% over the past year, but it still trades at a multiple of 23 times projected earnings. This is just above the company's 10-year average, according to Bloomberg data.
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According to Stefan Slowinski, an analyst at BNP Paribas Exane, the public cloud segment has been the strongest secular growth trend in all of enterprise IT recently. If the cloud business is weakening, this makes investors even more cautious about the market overall.
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Microsoft is still investing in Azure and announced Monday that it will invest more in OpenAI, the artificial intelligence research lab behind ChatGPT. The company said last week that it was making OpenAI tools broadly available to its cloud customers and would add the ChatGPT bot "soon."
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The Nasdaq 100 Index appears to be breaking out of its range, after a year of sporadic rallies. The tech-heavy gauge has jumped 5.1% in the last two sessions, fueled by strong Netflix Inc. results and job cut announcements from Alphabet Inc. and Spotify Technology SA. The index on Monday closed above its downward trend line – something it had failed to do on multiple occasions in 2022. Big Tech earnings, which Microsoft kicks off tomorrow, will determine if this upward momentum has enough steam to carry on, says Gurmit Kapoor, Aurel BGC cross-asset sales trader.