Microsoft Corporation (NASDAQ:MSFT) has been on a tear in 2017, up 17%. However, MSFT stock has been pulling back in recent trading. Shares are down more than 3% and while that may not be much, it may be the start of a good buying opportunity.
Just last week I said investors should consider buying Microsoft stock, but on a pullback. Since we’re on the topic though, let’s get the technicals out of the way.
Trading MSFT Stock
Microsoft stock is currently near $72.50. Ideally, we would be buyers on a dip to at least $71.22, where the 50-day moving average is currently resting. Even more ideal though would be a pullback to stronger support.
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On the chart, that’s the green and black lines. This would put MSFT stock between $68 and $70.
Will that type of pullback materialize? If we look at the the Relative Strength Index — which measures how oversold or overbought a stock is — we see it’s sitting near 50 RSI support. It bounced on Friday and this could prove to be a temporary low.
Admittedly, I would have more conviction buying between $68 and $70 on strong support than I would at $72.50 buying on RSI trends. But this could put shares in-line to test its prior highs near $74.50.
Perhaps this type of price action will encourage investors to buy a half position now and the other half later. Considering the rather tepid response to the strong jobs report on Friday though, some investors may rather take their chances waiting for a deeper pullback.
Microsoft Stock: What About Earnings?
Investors may have trouble waiting for a market-wide pullback to take down MSFT stock. This is especially true after Microsoft handedly beat on earnings-per-share and revenue expectations just two weeks ago.
Its businesses are doing well. LinkedIn is helping drive revenue growth. Its Azure cloud division saw revenue rise 97% year-over-year. The industry remains strong, as companies like Amazon.com, Inc. (NASDAQ:AMZN), Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and Alibaba Group Holding Ltd (NYSE:BABA) continue to report strong results as well.
Because of Microsoft’s accelerating revenue, shares have increasingly commanded a higher valuation over the years. Some may argue this is bearish and MSFT will decline as its valuation reverts to the mean. I don’t agree with this assessment, as Microsoft has better growth now, while its vision of future growth is more clear under CEO Satya Nadella.
Let’s Talk About That Growth
Just because there’s strength in an industry, doesn’t mean every company should try to be in it. For instance, Microsoft realizes mobile isn’t working out. Consumers want Apple Inc. (NASDAQ:AAPL) and its iPhone. If they don’t want that, they buy an Android device. Consumers don’t want a Nokia device run on a Window’s OS. If they do, there aren’t very many of them. Certainly not enough to topple iOS and Android.
So Microsoft removing focus from this segment makes sense, instead of focusing on areas where it can excel. Obviously the cloud is one area of expertise. But another up-and-coming industry gaining traction? Artificial Intelligence.
The company’s recent annual report was littered with references to A.I. vs. none in the prior year. Its corporate vision statement made changes too. It previously read, “Our strategic vision is to compete and grow as a productivity and platform company for the mobile-first and cloud-first world.”
It now reads, “Our strategic vision is to compete and grow by building best-in-class platforms and productivity services for an intelligent cloud and an intelligent edge infused with AI.”
Think MSFT is heading in a different direction? Me too, and I think it’s a good one. Countless tech titans — ranging from Mark Cuban, to Tesla Inc (NASDAQ:TSLA) CEO Elon Musk, to Amazon’s Jeff Bezos — have made comments on how large of a role A.I. will play in the future.
For better or for worse, A.I. will be a disruptor. And Microsoft doesn’t plan on missing the wave like it did in mobile. It will be an early player and a big one in this emerging technology.
Bottom Line on MSFT
In the end, we have a stock with solid revenue growth (high single digits) and roughly 10% annual earnings growth. Some may question it trading at 20x forward earnings. However, with a visionary leader in Nadella and Microsoft tapping new key growth markets, many feel it’s worth the premium.
Plus, would you rather own a 10-year Treasury or MSFT stock, both of which pay investors about a 2.2% yield? I’ll take the latter as well.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, he did not hold a position in any of the aforementioned securities.
