Hold on to that confetti, people; you might not be invited to this party.
The recent market surge, driven by blowout earnings reports from Facebook parent Meta Platforms (META) and software giant Microsoft (MSFT) , put many investors in a festive mood.
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Let's take a look at Microsoft, which clobbered Wall Street's fiscal-fourth-quarter earnings expectations.
Shares of the Redmond, Wash., software and cloud-services colossus surged past $550, thanks in part to strong results from its cloud and AIbusinesses.
“The rate of innovation and the speed of diffusion is unlike anything we have seen,” CEO Satya Nadella said during the company's earnings call. “To that end, we are building the most comprehensive suite of AI products and tech stack at massive scale.”
Revenue increased 18%, marking the fastest growth in more than three years.
“We are going through a generational tech shift with AI, and I have never been more confident in Microsoft’s opportunity to drive long-term growth and define what the future looks like,” he said.
Image source: Ben Kriemann/Getty Images
Analyst cites Microsoft impressive results
TheStreet Pro's lead portfolio manager, Chris Versace, said Microsoft guided Azure growth to 37% year over year in the current quarter and hiked its capital spending for the period to $30 billion, confirming that AI demand remains robust and the data center infrastructure shortage continues.
“With $368 billion of contracted backlog for Azure and Microsoft Cloud, we should see elevated capital spending levels continue,” he said.
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Shares of Microsoft, Meta and AI-chip maker Nvidia (NVDA) alone account for just over 18% of the S&P 500’s weighting, Versace said.
“While it may be a bit premature to say, it sure looks to us like the AI and data center arms race isn’t slowing down,” he said.
Several investment firms issued research reports after Microsoft reported results.
Truist analyst Joel Fishbein raised the investment firm's price target to $650 from $600 and maintained a buy rating on MSFT shares, according to The Fly.
Microsoft delivered impressive results, Fishbein said, as momentum continued to build in Azure. The segment accelerated by 6 percentage points from fiscal Q3, he wrote.
Management also called out strength in migrations as well as continued expansion of AI workloads driving the segment, he added.
Wedbush raised its price target on Microsoft to $625 from $600 and affirmed an outperform rating on the shares, citing “eye-popping” cloud and AI strength.
The firms said that this quarter was “music to the ears of MSFT bulls” as it exceeded Wall Street expectations with significantly reaccelerated Azure growth. The AI revolution remains prominent with more companies doubling down on these strategic initiatives, the firm said.
Trader warns of bifurcated market
On the other hand, TheStreet Pro's James “Rev Shark” DePorre isn't quite down with the market euphoria.
DePorre, a self-taught stock trader and the founder of Shark Investing, said markets were sliding on July 30 after Federal Reserve Chairman Jerome Powell delivered a more hawkish message than many investors had anticipated.
But that turned around after Microsoft and Meta posted their stellar results.
Related: Bank of America quietly reboots Microsoft stock price target
“Both companies far exceeded expectations, but, most importantly, they signaled a substantial expansion in capital spending as they race to dominate the AI industry,” he said.
DePorre said the AI industry and the Magnificent 7 stocks (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) in particular are dominating economic growth and rendering the fuss about the Fed and interest rates nearly meaningless.
A cut in interest rates would be nice, he added, “but when you have this level of growth in mega-cap technology names, it isn’t that important.”
“The primary challenge for investors at this point is dealing with a bifurcated market,” DePorre said.
“The Magnificent 7 names dominate the indexes, and there is still tremendous demand for these stocks. But they cover up any weakness in thousands of other names and in other areas of the market,” he wrote.
Microsoft has added about $300 billion in market cap after its earnings, he said, which is more than the value of 475 of the stocks in the S&P 500. Concentration in the AI giants is becoming even more extreme and greatly distorts what the average stock is doing.
He said the business media do “a very poor job of distinguishing between the strength of the indexes and the health of the overall market.”
“The risk of deeper corrective action in many stocks is increasing, and the great likelihood is that it will be covered up by the strength of Meta and Microsoft,” DePorre said.
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