Microsoft Corporation (MSFT) Stock Looks Overbought. It Isn’t.

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Few names in the markets have almost universal appeal. Microsoft Corporation (NASDAQ:MSFT) is one of them. Sure, Apple Inc. (NASDAQ:AAPL) products have more appeal, Alphabet Inc (NASDAQ:GOOG,NASDAQ:GOOGL) is more popular and Amazon.com, Inc (NASDAQ:AMZN) is more engaging, but let’s give credit where credit is due. Most of us have grown up with Microsoft programs, and we continue to use them frequently to this day.

Microsoft Corporation (MSFT) Stock Looks Overbought. It Isn't.
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Of course, emotional sentiment only goes so far. To prove its relevance in a changing world, Microsoft must deliver the goods. For most of this decade, the results for Microsoft stock have been fantastic.

We’re talking five out of seven years in the black, with an average annual profit of nearly 14%. In addition, MSFT stock has enjoyed four consecutive years of double-digit growth.

I don’t care how many caveats you can mention about the proverbial old dog … that’s a trick that’s tough to master at any age. Seemingly, the change at the top of the Microsoft war room, from Steve Ballmer to Satya Nadella, is working wonders. Most importantly, the willingness to aggressively push into new territory is encouraging for potential Microsoft shareholders.

InvestorPlace contributor Will Ashworth took this confidence further by declaring that MSFT stock will hit $80 this year. Is this wishful thinking, or is there more to this than mere bravado?

Challenges Facing MSFT stock

First things first — I admire the guts Ashworth displayed. That’s putting yourself out there and giving clarity to your point of view. It’s something I wish I could see in Washington, but that’s a whole different ballgame.

With MSFT stock specifically, the bullish argument is an easy one, but so is the cautious approach. Shares have soared despite the wave of competition in the consumer tech sector. InvestorPlace contributor Vince Martin speaks for a lot of people when he wrote, “I continue to be surprised at the strength shown by Microsoft stock. MSFT stock has risen roughly 150% in just four years — despite little movement in profits.”

The lack of fundamental growth is even more perplexing when you consider Microsoft’s position within the fierce environment. The company is either lagging, or is getting challenged by rising up-and-comers. Martin writes:

“For Office 365, Tableau Software Inc (NYSE:DATA) is challenging Excel — and 27% revenue growth in 2016 suggests DATA is taking share from MSFT. Behemoths like Oracle Corporation (NYSE:ORCL) and many others are in the cloud space. Microsoft’s Dynamics CRM product is a distant second to salesforce.com, inc. (NYSE:CRM).”

A huge concern for those trading MSFT stock is the market capitalization. I’m not a fan of focusing on any one metric. Still, with its equity valued at half a trillion dollars, you have to take a step back. Is Microsoft stock really worth that much?

MSFT stock, Microsoft stock
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Source: Source: JYE Financial, unless otherwise indicated

Microsoft Stock Is a Proven Winner

Admittedly, that’s not the direction the trend should go. Nevertheless, I think Ashworth is going to be a happy camper. Like other tech names, Microsoft stock starts off the year fairly slowly. For example, its first quarter returns are a relatively pedestrian 8%.

But at year’s end, the average return jumps up to 30.7%, nearly four times higher. That also means that those who are concerned about this year’s slow start for MSFT stock shouldn’t be.

The other attribute that is remarkable about Microsoft is its resiliency. Between 2000 and 2011, MSFT stock suffered a negative Q1 performance ten times. But in four of those instances, shares managed to claw back positive returns for the year. That provides a lot of security for those making strongly optimistic calls for Microsoft stock.

While investors have reason to look at MSFT cautiously, I think Wall Street is giving Nadella and company a fair shake. They want to see what it can do with its long-term strategy, and the signs are encouraging. A prime example is Microsoft’s high-profile acquisition of LinkedIn. By integrating its intellectual capital with Microsoft’s vast networks, it can do serious damage in the social media sphere.

Overall, $80 for Microsoft stock is very reasonable. Although not dominant, it’s competing well in some of the most exciting and high-growth sectors. Both the company and the markets are loving the change in leadership and culture. Finally, Microsoft continues to find ways to do well, even in the most trying of circumstances. The only question is, can I be the first to call $100 in 2018?

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/msft-stock-looks-overbought/.

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