MSFT Upgrade Points to Margin Strength, Bullish AI Profit Path

SPEAKER_1 (0:00)

We're back on Morning Trade Live. Let's focus on the one year chart for Microsoft. Shares down 2% year of the year, but up 40% from the lows in late June. Remembering we had seen it come off quite considerably, but it has recovered from those lows, as we've seen investors wrapping their arms a lot more around the software trade that Microsoft obviously included. It's been putting up some good earnings as well, and shares now receiving an upgrade this morning. So that's the focus of the Morning Trade. Joining us for a closer look at this is Alex Coffey. Good morning to you, Alex.

Just walk us through what we got here from the analysts, because I was just looking at the reaction here. We were trading higher, but we've slipped now.

Alex Coffey (0:42)

Yeah, all in all, though, given the context that the overall market's under a bit of pressure here, Sam, I would say on the margins, slight outperformance even still from Microsoft. A lot of that is due to the love it's getting from the analyst community today, with Stifel upgrading the stock to buy from hold and raising its price target to 575 from 530

When you look at what the firm said, it says it's growing more confident in Microsoft's ability to sustain revenue growth into the mid to upper teens, pointing to rapid advances in open weight AI models, and a strategy that isn't necessarily tied to any single large language model provider.

They also highlight Microsoft's strong cost discipline, saying that the operating expense efficiency should help keep margins stable while robust cash flow reduces the need for any outside financing. The analyst also notes that some of its earlier concerns around gross margins have eased. Improving Azure efficiency, the end of certain open AI related payments following an April contract revision, more disciplined capital spending and a tighter operating expense control are all expected to support current margin levels. So all in all, Stifel sees Microsoft's AI strategy, Cloud efficiency gains and financial strength combining to support both profitability, Sam, and sustained growth going forward. We know the stock's been on an incredible run as it recovered dramatically post-earnings, and it's largely held on to those gains.

SPEAKER_1 (2:21)

Yes, it certainly has. As you mentioned, I mean, not faring as bad as the rest today. It actually was contributing to the S&P 500 with that gain earlier today, but only under pressure marginally. Thanks for the details of that. Stifel's analyst note this morning, Alex, let's trade the name now with Charles Moon, stock strategist at Prosper Trading Academy. Good morning to you, Charles. Just walk us through an example trade on Microsoft.

Charles Moon (2:44)

Yeah, for me, I like the upside. They've been applying a lot of pressure, but they've gotten stuck at this kind of 509 to 515 zone. And the most notable prices that I'm watching here is 497, 494 on the downside. So if Microsoft could continue to float above these levels, I really like the October 9th Microsoft 512 half calls at 750 or lower. Now the risk is pretty big. It's gonna be around 75%.

But I like the stock to make this push for around that 518 price, which essentially would put these contracts near 100%.

But I could actually see that break out through that level and a strong push towards 535 in the best case scenario. There's a gap fill in that range. And that's what we have seen with these upside trajectories on stocks, that they've been targeting these lofty levels and been able to achieve them in a short period of time. And with this kind of back and forth trading when Microsoft is really building up and harnessing these energies. So certainly if it breaks down below the 494 level, we're not gonna want to be long. And if it certainly breaks through this 510 price and starts pushing towards that 518ish price and breaks free, it's wide open. It could certainly make a very similar break out, the likes of which we have seen here recently in Metta. Perhaps Microsoft will need a catalyst, but overall, they're doing what's called a ramping camp. And for me, that tends to be pretty bullish in the long run, especially at this market is going to be rallying.

SPEAKER_1 (4:21)

All right. Let's talk about the broader market now, Charles. I'm just wondering what your thoughts are with obviously a 10 year north of 5%, once again, the highest level since 7 on some strong PMIs, some inflationary concerns here, oil picking up as well. I mean, not faring too bad as far as equities are concerned, but just a marginal pullback here. I mean, the NDX seems to be under the most pressure down one.