MSFT Upgrade Points to Margin Strength, Bullish AI Profit Path

free on Schwab network.com. We're back on Morning Trade Live. Let's focus on the one year chart for Microsoft shares, down 2% year over 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 train, 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. Yeah. All in all though given the context that the overall market is under a bit of pressure here, Sam. I would say on the margin 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 upgraded the stock to buy from hold and raising its price target to 5.75 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. Yes it certainly has. And 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 Stifel 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. Yeah for me I look I like the upside. They've been applying a lot of pressure. But they've you know gotten stuck at this kind of 509 to 515 zone. And the most notable prices that I'm watching here is 497, up 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 going to 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 breakout 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, you know, lofty levels and been able to achieve them in a short period of time. And, you know, with this kind of back and forth trading with Microsoft is really building up and harnessing this energy. So certainly if it breaks down below the 494, 94 level, we're not going to want to be long. And if it's certainly breaks through this 510 price and starts pushing towards that 518 ish price and breaks free, it's wide open. It could certainly make a very similar breakout, the likes of which we have seen here recently in meta. Perhaps Microsoft will need a catalyst, but overall, you know, they're doing what's called a ramping camp. And for me that tends to be pretty bullish in the long run, especially if this market is going to be rallying. All right. Let's talk about the broader market now Charles I'm just wondering what your thoughts are with obviously a ten year north of 5% once again the highest level since zero seven 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 end seems to be under the most pressure down one. Yeah. But you know the index has also been the leader. You know the Q's made a new all time high print yesterday along with end. And you know quite frankly the balance of the market is attributed to the news in the Middle East. Obviously inflationary data is a concern because the first rate hike has happened in September, which opens the door to the potential of at least one. But the idea of two and having two more rate hikes this year is what's going to cause this market to be a little bit more shakier. We will see some risk off movement, but all in all, it's not too surprising that we have a pullback after making new all time highs. And as well being towards the end of the month, you know, ten we tend to see every month around the 24th to 25th. And especially being at the end of the quarter, a bit of rebalancing. You know, this rebalancing comes in from institutions, from ETFs, from mutual funds. So, you know, we, we tend to see kind of surprise movement in the markets. It wouldn't surprise me at all tomorrow to see a nice little bounce back here. You know, especially if talks, you know quiet down. If crude, you know, you know, slows down that upward pressure. It wouldn't surprise me that retail jumps right back in on these pullbacks. Yeah. And obviously let's see what Trump and XI have to say about AI as well. Because as Yardeni said it looks more like a Silicon Valley board meeting than a diplomatic summit. At this point. We'll have to wait and see.