Bull v Bear: Microsoft shares turn a corner but is there further to run?

Unloved software stocks have been rallying the last few days – some bottom fishing or just high growth stocks offering value? The iShares Expanded Tech Software ETF has had its best three-day streak in a year, with Microsoft among the most noteworthy gainers.

Microsoft stock has just delivered one of its best performances in years, gaining around 10% over just three sessions, almost its best three-day performance since 2020. Shares rose to as high as $414 as the stock advanced almost 5% on Wednesday (15 Apr) to stretch its bounce back above its 50-day moving average.

It’s only the third three-day run of 2%+ daily advances since the dotcom era, according to Bespoke Investment Group, underlining just how big a move it’s been. The stock is up 11% in April, but down 26% from the high - the scale of the move is a lot about the rotation back into some beaten-up software stocks, but there are reasons why investor, having soured on the stock, are looking at MSFT again.

Microsoft hit hard by AI fears

Shares in Microsoft had traded down about –36% below their all-time high as a combination of fears about AI replacing its core software offerings and the company’s ballooning capex which has so far failed to show up in accelerating cloud revenue growth. Azure revenues grew at 39% in the last quarter compared with 40% in the prior quarter. The earnings report card sent the stock sharply lower. Investors have also wondered whether it’s right for Microsoft to rely so heavily on OpenAI for its backlog.

There are, however, reasons why capex hasn’t shown up in growth in, the company’s cloud-computing platform, Azure. It’s likely, according to Bernstein, that the company is allocating computing toward training its own models and capacity to apps like Office and Copilot. But Azure revenue should start to pick up as it can take a couple of quarters before investments in hardware like GPUs shows up in revenue.

And while investors may baulk at the size of AI capex, Microsoft looks well placed to monetize AI spend quickly due to its Azure cloud infrastructure. 

A survey of IT executives conducted by KeyBanc showed that 85% planned to spend more on the Azure platform, while the data also indicated customers are increasing use of the Copilot AI assistant. KeyBanc has an Overweight rating on Microsoft with a $600 price target.

Meanwhile Microsoft continues to scale its own AI infrastructure. On Wednesday it was reported it will lease additional data centre capacity in Norway that had originally been earmarked for OpenAI. The site in the Arctic Circle is operated by Nscale. Last month MSFT took on a data centre site in Texas originally intended for OpenAI and Oracle.

Nevertheless, there remains some negative sentiment on Microsoft’s software exposure and some doubts about Copilot’s competitiveness, particularly due to innovation from AI Labs.

Looking at the chart we can see significant near-term bullish momentum which could get further support from the move above the 50-day SMA. Wednesday’s price action breached the 6 March swing high at $413 but the close below this level may suggest that it’s acting as near-term resistance before bulls can look to close the January earnings release gap down from $480.