The upcoming week will be packed with major US tech companies’ earnings releases, which are expected to draw significant attention as the tech giants are going to measure up to a tough year-ago comparison when revenue was surging due to the pandemic's repercussions. The software behemoth Microsoft is the first from the tech gang to unveil its Q1 financial performance on Tuesday, April 26, after Wall Street’s closing bell. The third most valuable publicly traded company in the world is expected to record solid revenue and earnings figures, despite its share price deprecation of almost 18% in 2022. That said, the consensus recommendation from Refinitiv analysts is ‘buy’, indicating bright growth prospects for the company.

Monetary tightening weighs on tech stocks

At the beginning of the year, the Fed stated that it is going to act aggressively in its effort to cool down inflation, which was generating fresh multi-year highs in each succeeding month. In March, the central bank proceeded with the first from a series of rate hikes, while in April it announced a rapid reduction in its balance sheet. These moves triggered a massive sell-off in bond markets, which pushed bond yields higher, causing discount rates to increase and valuations to decrease accordingly.

Rising interest rates directly reduce the value of the companies’ futures cash flows. Therefore, this environment is extremely unfavorable for tech stocks as their performance heavily depends on their growth prospects. Moreover, higher interest rates could discourage firms’ borrowing, curtailing their dry powder for investment and development spending.

Microsoft’s diversified business plan could prove catalytic

Microsoft has multiple sources of revenue which ensure that the company can not only survive but also grow and expand. Apart from being a software company, its cloud services have got a significant boost since the pandemic outbreak, while many companies continue to adopt Azure for their operational needs as remote working seems to be a trend that is here to stay.

Furthermore, with the acquisition of Activision Blizzard, Microsoft’s share in the vastly expanding gaming sector is anticipated to increase substantially. In addition, the firm is also thriving in the cybersecurity industry as it recently managed to disrupt a group of Russian-backed hackers targeting Ukraine.

As the Metaverse mania intensifies, Microsoft intends to create a Meta environment called Microsoft Mesh, which would contain the virtual representation of all Microsoft tools and allow its users to create avatars and interact with each other.

Solid earnings but headwinds emerge

Microsoft is set to post a strong first quarter performance, but there are looming risks on the horizon. The software behemoth is expected to report revenue of $48.98 billion, according to consensus estimates by Refinitiv IBES, which would produce year-on-year growth of 17.45%. Earnings per share (EPS) are estimated to rise to $2.18, representing a 11.80% increase compared to the same quarter a year ago.

Despite the solid growth, there are a couple of idiosyncratic risks on the radar. Firstly, the firm is under regulatory scrutiny both for its Azure business practices in Europe as well as for its upcoming acquisition with Activision Blizzard. Moreover, the recent lockdown in China in combination with the ongoing war has triggered a new wave of supply chain disruptions, leading to a shortage in semiconductor chips, which are an essential element for most of Microsoft’s hardware products.

Valuation remains expensive despite the recent downside correction

Markets seem confident that Microsoft can achieve its growth targets. The firm is currently valued with a forward 12-month price to earnings (P/E) ratio of 26.6, which is a massive outperformance considering the technology sector’s average of -14,717. Moreover, its trailing 12-month P/E ratio is currently at 30.7, with most of its major competitors and benchmarks reporting a significantly lower figure. Therefore, investors seem to be pricing in massive growth potential for the firm, while it could also be argued that the stock is currently overpriced.

Will the stock price rebound in 2022?

After a stellar 2021 in which Microsoft’s stock price marched to a new all-time high, 2022 brought some weakness in the price action. Therefore, investors will be closely eyeing the firm’s Q1 earnings release for signs of persistent fundamental strength even if macro headwinds are mounting.

In the positive scenario, bullish forces could propel the price towards $293. Successfully breaching this region, the price might then test the $305 barrier.

On the flipside, should financial figures disappoint, the bears might aim for $276 before the price declines towards the 2022 low of $270.