Tech to Sell: Microsoft
At $25 in late 2011, Microsoft (NASDAQ:MSFT) was looking like quite a bargain. Now the stock is up more than 22% in the past three months and approaching a 52-week high … and appears a bit overbought.
The obvious long-term challenge Microsoft faces is the slow erosion of its Windows dominance because of tablet computers and smartphone capabilities. Microsoft also faces increased challenges from the “cloud” as the idea of shrink-wrapped software becomes obsolete. Beyond the threat of competition, the move also will hurt margins even if its own Office 365 cloud offering succeeds.
There’s also the aggressive but undisciplined investment in new businesses, with little synergies or immediate impact to the bottom line. Take the 2011 Skype deal for $8.5 billion, which has yielded little thus far beyond an unimpressive integration into Microsoft’s unpopular Windows Phone operating system.
That’s to say nothing of the “brain drain” as innovative minds seek out Apple, Facebook and other tech companies.
I’ll admit there were good reasons to bid up Microsoft stock from the mid-$20s. Broader improvement in the economy will help boost spending on information technologies, and its Xbox gaming system and Kinect hardware continue to succeed. And while the clouds are theoretically gathering on the horizon, you can’t really complain about $4 billion in operating cash flow on $20 billion in revenue last quarter.
But now that we are into the $30s? I say sell Microsoft and trade up for a better tech stock. The upside is limited from here.