Microsoft Could Rally as EU Antitrust Case Nears Resolution

Key Points

• Microsoft is proposing to offer its Office suite without Teams and allowing better integration for competitors, addressing concerns about its market dominance.
• A resolution will reduce legal uncertainty and prevent the company from paying additional fines.
• Despite technical signs of a potential pullback, analysts maintain a Moderate Buy rating with a 13% upside target.

It didn’t really need much boosting, but Microsoft Corporation NASDAQ: MSFT stock got more good news in a week when the market is looking for direction. The latest catalyst for the stock is news that the company is likely to avoid fines from the European Union’s (EU) antitrust case regarding Microsoft Teams.

At issue were allegations that Microsoft had abused its market dominance by incorporating Microsoft Teams into its Office suite, which includes signature applications such as Word, Excel, and Outlook. Microsoft has proposed offering the Office suite without Teams at a lower price than when Teams is included.

In a blog post, Microsoft VP for European Government Affairs Nanna-Louise Linde described the proposal as a “clear and complete resolution” to its rivals’ concerns and that Europeans would have more choice. However, the EU says it will seek feedback from Microsoft rivals and customers before deciding whether to accept the offer. Interested parties have a month to provide feedback.

The First Successful Attack on Microsoft’s Walled Garden?

This case has been ongoing since 2020, so it’s not top-of-mind for many investors. However, lawsuits of any duration can weigh on earnings expectations. Microsoft has already paid the EU more than 2 billion euros, or roughly $2.67 billion, over the past several years. So at a time when earnings may be under pressure, it’s good for Microsoft to put this case behind it.

That’s why, based on the headline proposal alone, it’s reasonable to wonder why this should take so long. The price difference between the two suites is 8 euros, or about $9. While the headline draws attention, it’s the details that make the story more compelling.

Under Microsoft’s proposal, competitors would be able to interoperate with certain Microsoft products and services for specific functions. They would also be able to embed Office applications (e.g., Word, Excel, PowerPoint) in their own products and integrate their products into Microsoft’s productivity applications.

That’s significant because the Windows operating system dominates the market and has increasingly drawn the ire of competitors for creating a “walled garden” effect because it lacks open communication with other platforms.

This reputation has been amplified with the introduction of Teams and, more recently, its AI initiatives with OpenAI. The deal with the EU, which would span 10 years, is one step toward, perhaps, a more open and inviting Office suite.

Does MSFT Stock Have Short-Term Momentum?

Like many technology stocks, Microsoft stock gapped up sharply after its earnings report on May 1. However, the stock was already off the 52-week low it made in March and April. Microsoft has been experiencing positive momentum as analysts are bullish about the company’s strategic investments in AI and cloud computing.

However, naysayers believe much of that growth is priced in, and MSFT stock is headed back to its April lows. The fact that the stock is trading at overbought levels reinforces that. A pullback on May 21 stopped its move to the all-time high it made last summer. It may also end a seven-day win streak and break the stock’s momentum.

Further support for a move lower is the stock’s P/E ratio around 36x, which is a slight premium to its historical average. Also, Microsoft’s estimated earnings per share (EPS) growth of 11.35% is below its three-year average of 15.9%. From a technical standpoint, the move lower on May 21 dropped the stock below its 50- and 200-day simple moving averages, which may be a sign that a reversal is in place.

While short-term volatility exists, Microsoft's strong fundamentals and market position suggest a favorable outlook for investors. Analysts continue to bid the stock higher. The Microsoft analyst forecasts on MarketBeat give MSFT stock a Moderate Buy rating with a $512.63 price target that marks a 13% upside from its price on May 21.