Microsoft’s Targeted Upside Might Be Too Good to Ignore

Key Points

• Microsoft shares have been trending solidly upward since August’s low. 
• The stock’s technical performance is bullish, as are recent analyst updates. 
• Some concerns exist, but these are more than outweighed by the positives. 

Since hitting a record back in July and then selling off, shares of tech titan Microsoft Corp. NASDAQ: MSFT have been a bit slower than others in getting back to highs. For context, the benchmark S&P 500 index was hitting fresh highs by the middle of September and, as recently as Monday, was closing at a new record. 

Confirmation from the Fed that they’re going to start cutting rates and continuing signs that inflation is cooling have combined to re-ignite the risk-on sentiment that controlled stocks for much of the first six months of the year. Against the S&P 500’s 12% gain from its August lows, Microsoft has tacked on as much as 14%, but a week of losses means it’s holding on to less than 10% of them right now. 

However, despite what appears to be this lackluster performance, there are several reasons to think that Microsoft is a solid buy right now and that any further selling will only boost its risk/reward profile. Let’s jump in and take a look. 

Microsoft's Fundamental Performance

To start with, let’s look at Microsoft’s fundamental performance. It’s worth pointing out that Microsoft’s most recent earnings report had a lot to do not only with its stock’s selloff in August but also with the bullish outlook investors and analysts have for it. The company smashed analyst expectations on both its headline numbers, which was always a good sign but then provided lighter-than-expected forward guidance for revenue from its Azure cloud unit. 

Considering how softly Microsoft shares had been trading throughout July, it was understandable that a weak outlook like this sent them even lower. But what really compounded matters was the fact that the broader market started sinking the following week, as a dodgy jobs report ignited concerns that the Fed had delayed cutting rates too long. 

Wall Street Targets Suggest Major Upside for Microsoft Stock

However, for those of us on the sidelines thinking about getting involved, there’s actually a lot to like here. Despite issuing weak forward guidance for a key part of the business and then enduring one of the wider stock market’s worst weeks in years, shares of Microsoft have been gaining since the first week of August. Not only have they been gaining, but they’ve been setting a pattern of higher, lower, and higher highs. This is one of the most bullish setups out there and indicates that there is a constant source of demand for Microsoft shares during any dip.

Considering the stock has fallen about 5% in the past two weeks alone, we could soon see this source of demand being tapped again. Beyond the promising technical performance, Microsoft shares are also enjoying the benefit of being highly rated by Wall Street analysts. 

Take DA Davidson, for example, which reiterated its $475 price target on Microsoft shares in the last week of September. From where the stock closed on Tuesday evening, that suggests a targeted upside of nearly 15%. There’s also the $506 price target from Morgan Stanley last month and the $550 target from Wedbush in the aftermath of Microsoft’s earnings. It’s not often that analysts call for a potential upside of 30%, but that’s the case with Microsoft. 

The Bottom Line: Microsoft’s Dip Could Be a Strong Buying Opportunity

Some concerns are worth noting, such as those of Allspring Global Investments, which noted earlier this week, "There’s some AI fatigue when it comes to companies like Microsoft, given the incredible run they’ve had.” There have also been some unfavorable comparisons between Microsoft and Oracle Corporation NYSE: ORCL in this regard, given the fact that the latter is trading at a lower valuation. 

However, aside from the weaker-than-expected Azure update, which has surely been properly baked into Microsoft’s shares by now, there are far more reasons to like the stock than to avoid it. The technical case is strong, while the analysts' targeted upside speaks for itself. Let’s see if the current dip can start finding some buyers in the next few sessions and turning north once again.