The article is written by Tina Teng & Kelvin Wong, Markets Analysts, CMC Markets APAC & Canada
Microsoft and Google’s parent company Alphabet will report their previous quarter earnings on Tuesday, 27 July after the US closing bell. After Snapchat spooked the US stock market with its disappointing earnings result and guidance last Friday, market participants will shift their attention to focus on the major tech companies’ earnings results (Microsoft, Alphabet, Meta Platforms, Apple & Amazon) that are released this week.
Hence, Microsoft and Alphabet together with the remaining US big tech firms’ post-earnings share price performances will likely have a significant impact on the trend of the broader market as these firms have a significantly high combined market capitalization weightage in the S&P 500 and Nasdaq 100, along with the major risk event, the outcome of FOMC meeting on this Thursday.
Microsoft – a further slowdown in revenue growth
Microsoft’s share price has shed -23% from its January 2022 high. In the first quarter, the company reported slower revenue growth of 18% vs. a 20% growth in the prior quarter. But the company has beaten expectations for both bottom and top lines, thanks to the rapid growth of 26% in revenue from its cloud business, Azure, which has taken the second marketplace spot after Amazon’s AWS in cloud computing services. According to consensus estimates compiled by Nasdaq, Microsoft will continue to grow at a stable pace, with forecasted earnings at $2.28 per share, and $52.27 billion in revenue vs, $2.22 per share and $49.36 billion in the first quarter. Hence, the expectation for revenue growth is about 13% year over year, a further slowdown from the 18% recorded in the prior quarter. But at the same time, Microsoft may register a record annual revenue of $200 billion.
Despite expectations for another strong quarterly performance, the recent announcement to cut hirings may have a significant impact on its share price performance, making its guidance for future growth a key focus in the upcoming earnings report. Last week, Microsoft announced its plans to cut hiring in both the Azure cloud business and the security software unit, both of which are major business divisions that drive the company’s future growth. This recent headcount freeze announcement may indicate weak guidance for future growth, but it is worth noting that the June quarter is for the earnings report of Q4 FY22 (end of the fiscal year) when it usually makes spending plans for the new fiscal year of 2023.
Technical analysis – Potential bullish reversal configuration in play for Microsoft (MSFT)Source: CMC Markets as of 22 Jul 2022 (Click to enlarge the chart)
In the past 5 weeks, the price actions of Microsoft (MSFT) have started to trace out a potential bullish reversal “Inverse Head & Shoulders “configuration after it recorded a decline of -31% from its current all-time high of 349.66 printed on 22 November 2021 to its recent 14 June 2022 low of 241.52.
In addition, other key elements are supporting this potential impending bullish movement of MSFT; the recent decline of its price actions from 24 June 2022 to 14 July 2022 has been accompanied by a lower volume on average versus the prior decline of 21 April 2022 to 20 May 2022 (refer to the 2 highlighted boxes on the volume data). Secondly, the daily RSI oscillator has also traced out a recent “Double Bottom” bullish reversal configuration at its oversold region which indicates a potential built-up of upside momentum.
Overall, integrated technical analysis suggests that the recent 7-month major downtrend phase from 22 November 2021 all-time high to 14 June 2022 low is due for one to 3 months of potential corrective rebound movement. Clearance with a daily close above 268.30 upside trigger level reinforces the corrective rebound scenario towards the 291.00/296.50 resistance zone (gapped down from 8/11 April 2022, 200-day moving average & 50% Fibonacci retracement of the major downtrend phase from 22 November 2021 high to 14 June 2022 low)
On the other hand, a break with a daily close below 239.20 key medium-term pivotal support invalidates the corrective rebound scenario for an extension of the impulsive down move sequence of the major downtrend phase towards the next support zone at 215.50/209.70.
Alphabet – a challenge in advertising income
Google’s parent company has lost 27% in value on its market capitalization since January 2022 due to global headwinds and fierce competition from rivals, such as TikTok as its YouTube adverting revenue fell short of analysts’ expectations in the first quarter, reporting at $6.87 billion. The 20-for-1 stock split that has come into effect last Monday does not seem to help to reverse the lackluster movement of its share price.
However, its cloud business is on a fast-growing track with a 44% increase in revenue for the first quarter, though it is still at a loss of $931 million. This segment has taken the third marketplace spot behind Amazon’s AWS and Microsoft’s Azure, which is being seen as a key growth contributor to the overall business of Alphabet.
Another matrix that is worth paying attention to is the Traffic Acquisition Cost (TAC), reported at $11.99 billion in the first quarter, higher than analysts’ expectations. A continuation of such an elevated level of TAC may lead to a squeeze in its profit margin.
Consensus estimates compiled by Zacks Investment Research have called for $1.30 in earnings per share and $70.1 billion in revenue for the second quarter, which will indicate a 4.5% drop in earnings per share and a 14% year-on-year growth in revenue. This could be translated to a sharp decline in revenue growth where it recorded 23% year-on-year in the first quarter. Alphabet has also announced its plan to reduce hiring for the rest of the year due to the backdrop of an uncertain economic outlook, in line with the recent pessimistic hiring plans of other big tech companies.
Technical analysis – Alphabet remains in a range-bound configurationSource: CMC Markets as of 22 Jul 2022 (Click to enlarge the chart)
The recent major downtrend phase of Alphabet (GOOGL) that plummeted by -32.7% from its current all-time high of 151.44 (post 20 to 1 stock split) printed on 2 February 2022 to its recent 24 May 2022 low of 101.91 has started to take a breather in the form of an “Ascending Triangle” range configuration.
In addition, its medium-term momentum reading is muted as the daily RSI has remained capped below its key corresponding resistance at the 64% level and it is now at risk of a bearish breakdown below its intermediate corresponding ascending support at the 42% level. Based on integrated technical analysis, the price actions of GOOGL are likely to oscillate sideways between 119.40 and 105.70.
Only a clearance with a daily close above 119.40 validates a corrective rebound scenario towards the next resistance zone at 127.55/131.40 (former range support of 23 February/18 April 2022, 200-day moving average & 50% Fibonacci retracement of the recent major downtrend phase from 2 February 2022 high to 24 May 2022 low).
On the flip side, a break with a daily close below 105.70 sees an extension of the impulsive down move sequence of the major downtrend phase towards the next supports at 99.50 and 89.10 (former resistance congestion area of 14 December 2020/19 January 2021 & a Fibonacci retracement/expansion cluster).