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Can Microsoft Stock Break Out on Earnings, Pentagon Contract?

Bret Kenwell

It was a busy week for Microsoft (NASDAQ:MSFT) — and the week didn’t end at 4 p.m. on Friday. Not only did Microsoft report quarterly results a few days ago, but a large contract with the U.S. Department of Defense was announced going into the weekend. All of this coincides with a potential breakout setup in MSFT stock.

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So the question now is, can it break out?

If it can’t, the action would be pretty telling. There are a lot of positives and if MSFT stock can’t move higher on that, what could move it higher?

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When stocks act bearish on bullish news, it’s not a good sign. I’m not saying that will happen with Microsoft, but it’s an outcome investors should at least consider. Let’s take a closer look and see what’s going on with Microsoft stock.

Microsoft Earnings

Microsoft reported a better-than-expected quarter last week. Earnings of $1.38 per share topped estimates by 14 cents per share, while revenue of $33.1 billion topped expectations by $860 million and grew 13.7% year-over-year.

Fiscal Q2 revenue guidance of $11.3 billion to $11.5 billion topped consensus expectations of $11.4 billion, while guidance for smart cloud revenue also came in ahead of estimates. There were some concerns about cloud growth for Microsoft, but by and large, this was a strong quarter.

For a stock that’s been biding its time as it trades sideways, this could be just the thing MSFT needs.

The quarter also reassured the analyst community. Piper Jaffray has a “buy”-equivalent rating on Microsoft stock, along with a $158 price target. Wedbush analysts bumped their target to $160 from $150. Atlantic Equities also went to $160, from $155.

Trading MSFT Stock

chart of msft stock

Despite the solid quarter, MSFT stock didn’t move with the bullish conviction that investors were hoping for. Shares did rebound back over prior uptrend support (blue line), but did not break out like many had wanted.

Let’s rewind a little bit, though.

MSFT stock had been on fire until July, where it topped out at $141.20. From there, shares consolidated for months, riding uptrend support higher and finding “emergency support” at the 100-day moving average anytime trend support gave way. Both of those emergency occasions occurred in October, with the most recent occurrence happening just before earnings.

However, each rally faded once it approached the $140-$141 area. MSFT set up as an ascending triangle, a classic bullish pattern consisting of a series of higher lows that fail to penetrate a static level of resistance.

Now though, that resistance level will give way and bulls need to see the much-awaited move stick.

On Friday evening, it was announced that Microsoft won the JEDI cloud contract from the Pentagon over Amazon (NASDAQ:AMZN). The contract is worth as much as $10 billion and is giving MSFT stock price a shot in the arm. Shares were higher by almost 2.5% in pre-market trading to $144.40 on Monday.

In order for the breakout to hold though, Microsoft stock must stay above $142. Back below this mark and the breakout could fail. Above this mark and a continued move higher is possible.

Keep it simple: Over $142 is bullish, below not so much.


Bottom Line on MSFT

Sporting expectations for 11.5% revenue growth and 13.3% earnings growth this year, while trading at roughly 27 times this year’s earnings is not exactly bargain territory. But Microsoft stock continues to hold up very well. The stock market is near all-time highs and MSFT has been consolidating for months, with investors salivating for a breakout.

In my view, it’s not the time to bet against Microsoft. Its earnings clearly show there’s momentum in the business. With the SAP (NYSE:SAP) partnership sending more business Microsoft’s way and after landing the coveted JEDI contract, it’s clear that that momentum is only accelerating.

With fundamental momentum in hand, the bulls have a chance to gain momentum on the charts as well. I like MSFT stock as long as it’s over $142. Below and the stock needs to be re-evaluated. But for those looking for something to short, you may want to look beyond Microsoft.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.

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