Microsoft (MSFT) is set to report its fourth-quarter earnings on Wednesday, and investors are watching closely to see if the results can halt a prolonged slide. The stock has fallen roughly 30% from its October 2024 record high of $556, dropping to around $390 and trimming the company's market cap from over $3.89 trillion to $2.9 trillion.
Capex concerns and AI competition weigh on sentiment
The primary drag on MSFT shares has been investor unease over the company's massive capital expenditure plans. In its last earnings report, Microsoft guided for $190 billion in capital spending this year—a 61% increase year-over-year—driven by rising costs for memory, semiconductors, and server infrastructure. Similar to the market's reaction to Alphabet's capex increase last year, which sent Google stock down nearly 20% from its peak, Microsoft's spending plans have spooked shareholders.
Beyond the sheer scale of investment, questions persist about the return on investment (ROI) for Microsoft's flagship AI product, Copilot. Despite heavy spending, Copilot holds only about a 10% market share in the AI assistant space, trailing competitors like Claude and ChatGPT. While the platform boasts over 218 million users, only 15 million are paying customers, and growth in that segment may be slowing.
Adding to the pressure is the rise of Chinese AI models. Kimi, Qwen, and GLM have gained traction, intensifying competition and raising concerns about Microsoft's ability to maintain its lead. This dynamic has contributed to broader tech sector weakness, as seen in recent Nasdaq slides driven by chip stock selloffs and futures dropping on AI spending doubts.
What analysts expect from Q4 numbers
Consensus estimates call for revenue growth of 14.70% year-over-year to $87.67 billion, with earnings per share rising 16% to $4.24. Key segments to watch include the Intelligent Cloud unit, which grew 28% last quarter to $34.7 billion, and Productivity and Business Processes, up 13% to $35 billion. The More Personal Computing segment, which declined 3% to $13.2 billion, remains a drag.
Despite the stock's decline, valuation has become more attractive. Microsoft's forward price-to-earnings ratio has fallen to 22.76, below the sector median of 24 and well under its five-year average of 32. The company also boasts a rule-of-40 metric of 64%, suggesting it has room to increase dividends and share buybacks.
Technical setup and options market signal potential reversal
From a technical perspective, MSFT has formed a double-bottom pattern with support at $355 and a neckline at $465, a level last seen in June. This pattern often precedes a rebound. The MACD indicator is also approaching a bullish crossover. Meanwhile, the options market is pricing in an 8% move following earnings, with a put-to-call ratio of 0.42, indicating bullish sentiment. For more on this, see our analysis of options data pointing to a potential MSFT rally.
However, the broader market context remains cautious. Chip stocks have slid on China competition fears, and the tech-heavy Nasdaq has been under pressure. Whether Microsoft's earnings can serve as a catalyst for a sustained turnaround will depend on the company's ability to address capex concerns and demonstrate tangible AI monetization.
This article is for informational purposes only and does not constitute financial advice.
