Microsoft's targeted upside may be too good to ignore

Since the tech giant's shares hit a record in July and then sold off(NASDAQ:MSFT) were a little slower than others to get back up to speed. For comparison: the reference index S&P 500 reached new highs in mid-September and only closed with a new record on Monday.

The Fed's confirmation that it will begin cutting interest rates and ongoing signs of cooling inflation have combined to reignite the risk-on sentiment that dominated stocks for much of the first six months of the year. Against the S&P 500, which is up 12% from its August lows, Microsoft has gained as much as 14%, but a week of losses means the company is currently stuck at less than 10% of that.

But despite this seemingly weak performance, there are several reasons to believe that Microsoft is a good buy right now and that each further sale only increases the risk/reward ratio Profile. Let's jump in and take a look.

Microsoft's fundamental performance

First, let's look at Microsoft's basic performance. It's worth noting that Microsoft's recent earnings report had a lot to do not only with the stock's selloff in August, but also with the optimistic outlook that investors and analysts have for the company. The company beat analysts' expectations on both headlines, which was always a good sign, but then delivered a worse-than-expected forecast for revenue at its Azure cloud unit.

Considering how weakly Microsoft shares traded in July, it was understandable that a weak outlook like this would send them even lower. But what made matters worse was the fact that the overall market began to decline the following week as a dubious jobs report raised concerns that the Fed had delayed rate cuts for too long.

Wall Street targets suggest big upside potential for Microsoft shares

However, for those of us on the sidelines thinking about getting involved, there's actually a lot to like here. Despite giving weak future guidance for a key part of the company and then experiencing one of the stock market's worst weeks in years, Microsoft shares have trended upward since the first week of August. Not only have they gained, but they have also set a pattern of higher, lower and higher highs. This is one of the most bullish setups out there and suggests that there is a constant source of demand for Microsoft stock during any decline.

Considering the stock is down about 5% in the last two weeks alone, we could soon see this source of demand tapped up again. Beyond promising technical performance, Microsoft shares also enjoy the advantage of being highly rated by Wall Street analysts.

Take DA Davidson for example: which reiterated its $475 price target for Microsoft shares in the last week of September. From where the stock closed on Tuesday evening, that suggests so a targeted upside potential of almost 15%. There's also Morgan Stanley's $506 price target last month and Wedbush's $550 price target following Microsoft's earnings. It's not often that analysts predict a potential 30% upside, but that's the case with Microsoft.

Conclusion: Microsoft's collapse could be a good buying opportunity

Some concerns are worth noting, such as those from Allspring Global Investments, which noted earlier this week: “There is some AI fatigue among companies like Microsoft, given the incredible success they have had.” In this regard, there have also been some unfavorable comparisons between Microsoft and Oracle Corporation (NYSE: ORCL) as the latter trades at a lower valuation.

However, apart from the weaker than expected Azure update, which has certainly had a significant impact on Microsoft shares, there are far more reasons to like the share than to avoid it. The technical arguments are compelling, while the upside potential analysts are targeting speaks for itself. Let’s see if the current decline can find some buyers and turn north again in the next few sessions.

The article “Microsoft's Targeted Upside Might Be Too Good to Ignore” first appeared on MarketBeat.