The company is announcing its earnings on the 28th of July. What is next for the share price?


Company background

Microsoft is an American multinational technology corporation, headquartered in Washington. The company develops, manufactures, supports, licenses and sells computer software, personal computers, consumer electronics, as well as other related services. In fact, Microsoft is one of the largest broad-based technology providers in the world. The company has been dominating the PC software market for a long time now and has currently got more than 80% of the market share for operating systems. Moreover, the company’s Microsoft 365 application is one of the most well-known software globally.  Microsoft is now one of the two public cloud providers delivering a wide range of infrastructure-as-a-service (Iaas) and platform-as-a-service (PaaS) solutions at scale. The company’s wide range of products include PCs, tablets, gaming consoles, phones and other intelligent devices. Microsoft’s Azure offers cloud-based solutions, providing customers with software, platforms and other content.

Financial performance and Q1 earnings results

By looking at Microsoft’s financial statements, we should say the company has kept on growing its revenues and making higher profits for over 5 years now. In fact, the revenues of the company have almost doubled between 2016-2020, while the net income has tripled during that period of time. In other words, the company has kept on growing in the sector it operates and has gained more market share, by also keeping costs low, allowing it to boost its net profits, making more money for its shareholders. Actually, the company’s long-term debt has been decreasing in the past 4 years since 2017, meaning that Microsoft has not been dependent on using debt financing for its operations on a large scale, which has proven the effectiveness of its management during that period of time. As a matter of fact, the company’s debt to equity ratio is only 0.37, which is quite a conservative number especially during the coronavirus pandemic we have been living in for more than a year now.

Microsoft benefited from the adoption of Azure services that helped accelerate its global digital transformation and boosted the company’s results further. During the pandemic, the company has been also benefiting from the continuation of the remote work, online learning and tele healthcare trends. Moreover, the company has seen some solid numbers coming from its new Xbox consoles, as well as its growing use base in its different applications including Microsoft 365 suite and Dynamics.


By looking at the company’s earnings results, we shall say Microsoft has beaten analysts’ expectations in all of the past 4 quarters during the coronavirus pandemic. Moreover, the company has actually been growing its earnings in each of the past 3 quarters of 2020 (Q2, Q3 and Q4), followed by a little decrease in Q1 of 2021, where it still beat analysts’ expectations of $1.76 per share, delivering $1.95 per share and further confirming its strong financial performance and market positioning. We have been quite impressed by the company’s performance especially during the pandemic. It has been among the best performing companies in the past year and the quarterly earnings results coming out better than expected has led to a massive appreciation of the company’s share price, making high profits for investors and traders.

Microsoft is announcing its Q2 2021 earnings on the 28th of July and the expectations are for $1.90 per share while the company reported only $1.46 per share for the same quarter of last year. In case of a better report than expected we believe the share price could bounce further quickly after the report, and that would give us a chance to maximize our profitability to the upside. Based on the company’s strong financial performance in the past few years and the solid results it reported during the COVID-19 pandemic, we have remained very positive for the company’s future market performance and would be looking to add the stock to our portfolio.

Technical analysis

By looking at the daily chart of MSFT, we could see the massive uptrend that has been going on the stock in the past 13 months since the 23rd of March 2020. The stock bounced from the strong support at $131 back then to reach the current $277 highs, meaning the stock has more than doubled during that period of time – quite an impressive rally.

The most recent rally in the 2nd part of June has led to the price breaking the key resistance mark at $261 where lots of take-profit interest had taken place in the past and the price failed to break that level in the end of April. Yet, the recent breakout on the 22nd of June has been based on lots of buying pressure ahead of the upcoming earnings season on the 28th of July and the high expectations for it with the economy going back to normal levels after the pandemic times.

In other words, there has been even more buying interest for MSFT stock recently and that is giving more bullish indications to follow up on ahead of the earnings season.

Since there is enough time ahead of the earnings report in the end of July, we would prefer to wait for a bit of a pullback on the price instead of buying so high. Thus, we would expect to see lots of buying pressure should the price get closer to the support at $262. In fact, the 20 and 50 day moving averages stand right below that level, giving further bullish indications. The RSI and Stochastics have gone to the overbought territory and are also signaling for a potential profit-taking correction before another strong bullish rally takes place.

Should the price break that first key support at $262 it would be facing more buying pressure at around the next major support at $253. Either way, it is likely to bounce from one of these strong support marks and we would be looking to buy the stock ahead of the earnings report and make high profits to the upside.


Chart: MSFT


As you know, we at Dow Experts always include the importance of both fundamental and technical factors in our analyses because we believe they are key metrics for the overall performance of the instruments we analyze. Furthermore, before we take an action to buy the stock we are evaluating, we analyze the performance of the biggest ETFs out there in which the company we analyze plays a major role. In other words, we use our cross-sector correlation analysis in order to find out whether there is a similarity between the price-action trade of the current stock we are evaluating and if there is a confirmation by certain ETFs that have invested in that particular stock.

Only if there is a clear confirmation between the ETFs and indices we use for our correlation analysis then we can confirm whether it is a good idea to enter the market at the current prices or possibly be patient and wait for a better entry level at a more attractive price. In fact, it is important to mention that entry and exit levels are among the most important factors that determine a trader or an investor’s success on the market.

The XLK tracks an index of S&P 500 technology stocks, including all of the big names associated with the technology sector in the US, such as Apple, Microsoft, Visa, Intel, Mastercard, Cisco, Nvidia, Paypal & others. In fact, the XLK has been among the best performing ETFs in the past decade overall, following the great innovation that we have seen among those leading companies within the sector. They have kept on coming up with new products and services and have practically been leaders in the sector they operate. That of course in turn has been extremely bullish for their share price performance that has been therefore been boosting the XLK, helping it perform so well in the meantime as well. Actually, Microsoft plays an important role within the XLK with its 20% weight within the ETF, making it one of XLK’s top holdings.

By looking at the daily chart of the XLK, we could see the massive uptrend that took place in the past 15 months since the COVID-19 correction we saw in early 2020. Traders and investors started buying aggressively and the price bottomed out in the end of March 2020 from the $67 lows to reach the current highs at $151, representing a 125% return since then. Well, that was quite an impressive rally based on the strong financial and market performance of the technology stocks since then. The most recent break out above the $143-$144 resistance that took place on the XLK in the end of June was a further bullish indication that the chart has given, indicating for more potential rallies in the future. In fact, the price initially struggled to break above that level back in April but has already managed to do so ahead of the earnings season, giving lots of bullish indications. We believe that even if the price makes a bit of a profit-taking correction, it would find lots of buying pressure at that strong support (broken resistance) at $144, followed by the next major support standing at $137. Either way, the price is likely to bounce from one of these key support marks and make another bullish rally in the near future. The technical indicators, such as RSI and Stochastics have remained strongly bullish, which is quite logical taking into account the upcoming earnings results in the middle of July.


Chart: XLK

Overall, we shall say the recent performance of the XLK further confirms our bullish stance on the MSFT stock.


Before we jump into buying MSFT, we would like to analyze the most recent performance of the other ETF we are looking at today for a further confirmation as to whether we should add the stock to our portfolio.

The SPDR S&P 500 ETF (SPY) tracks a market-cap-weighted index of US large and mid-cap stocks and is the best recognized and oldest ETF and typically tops ranking for largest assets under management (AUM). As a matter of fact, the SPY has got $376 billion in assets under management. The SPY is also the ETF with the greatest trading volume with its daily average of $25 billion. Moreover, the SPY is very well diversified thanks to its investments in different sectors on the market. Its biggest holdings are Microsoft Corp., Apple Inc., Amazon.com, Facebook Inc., Alphabet (Google), Berkshire Hathaway, Inc., JPMorgan Chase Inc. & Visa Inc.

Microsoft represents 6% of SPY’s overall portfolio.

By looking at the daily candles of the SPY, we shall say the chart looks very similar to the XLK. After the massive uptrend between March 2020 and April 2020, the price initially struggled to break the key resistance at $420 in the end of April and after a few attempts to do so, it finally succeeded and broke above that resistance on the 23rd of June, giving more bullish indications. Logically speaking, more buying pressure then followed and motivated investors and traders to buy more and that has led to an immediate spike towards the current levels at $434. In case the price makes a bit of a profit-taking correction to the downside, we would expect to see lots of buying pressure at the first strong support (broken resistance) at $420 and it is very likely to see another bullish reversal from that point. Even if the price manages to break below that level, which is quite unexpected especially during the earnings season, it would be facing the next key support at $413 where more buying pressure is expected to take place. Either way, we believe any further downside movements are very limited and the recent performance of the SPY clearly confirms our bullish stance on the MSFT stock.

Chart: SPY



Conclusion

We at Dow Experts enjoy analyzing the performance of leading industry leaders as well as ETFs and benefiting from their recent financial performance and current market positioning.

We analyze the major fundamental factors, such as overall financial performance and market positioning, earnings results, expectations for the future and others, together with the technical factors and the recent share price performance and indications that the chart gives us in order to be able to maximize our profitability on a stock or an ETF we are analyzing.

Today’s analysis was focused on the recent performance of Microsoft Corp. (MSFT). The company has been a global leader in the technology sector for a long time now and keeps increasing its presence in that highly competitive market, further boosting its financial performance and market positioning and making more money for shareholders and traders.

We have been impressed by the company’s recent financial performance and believe the current share price is giving us an attractive buying opportunity that would give us a chance to maximize our profitability to the upside after the earnings report on the 28th of July especially if the company manages to beat the expectations and deliver another earnings growth, further confirming its great market positioning and financial performance for the past 3 months of 2021.

Thus, we would wait for a bit of a profit-taking correction and start buying MSFT stock at around $265-$270, right above the $262 support. We doubt the price would go lower than that key support before the earnings season but just in case that happens, we would be willing to add more to our buy positions at around $256, just above the $253 support. Our initial profit-taking target is set for $285-$290, followed by the next target at $310-$320 where we would be fully cashing in our profits and waiting for another potential profit-taking correction that would give us a chance to buy MSFT again at an attractive level in the future.



Sincerely,

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