Microsoft Corporation (NASDAQ:MSFT) tipped an all-time high last week, extending a rally that has boosted its share price more than 24% this year. What can MSFT stock investors expect next?
The Redmond, Wash. software maker will report earnings on Oct. 26, so it’s quite possible MSFT stock price will rally into the event. If that’s the case, and unless you’re a long-term investor, I wouldn’t hold Microsoft shares through the reporting date. The reasoning is simple: A big run-up into earnings usually leads to a pullback.
I have been a big bull in believing that MSFT stock price is generally heading higher. I also don’t doubt its earnings power. Microsoft is only up 5.2% since reporting stellar fiscal fourth-quarter results back in July. For being an almost $600 billion company, analysts somehow always come out short of Microsoft.
The company has beat earnings estimates for eight straight quarters and topped revenue expectations in seven of those periods. Heck, even last quarter earnings came in 38% above consensus expectations.
Why Should We Stick With Microsoft Stock?
I’m certainly not a seller of Microsoft stock. I just want short-term investors to be aware that over the next few weeks, should the MSFT stock price move higher, it could stall and/or pullback post-earnings. That’s all.
I think earnings will be good, especially with what we are seeing out of the cloud. Azure revenues nearly doubled last quarter and momentum remains strong for this business. If that’s not impressive, I don’t know what is. Microsoft’s acquisition of LinkedIn, although expensive, should also start to pay dividends soon and add to that revenue growth.
It wasn’t long ago that we were talking about Microsoft’s valuation. While it trades with a trailing price-to-earnings (P/E) ratio of 28.5 and forward P/E ratio of 21.4, that’s actually not as expensive as it may look. Consider that Alphabet Inc (NASDAQ:GOOGL), Alibaba Holding Group Ltd (NYSE:BABA) and Amazon.com, Inc. (NASDAQ:AMZN) all trade at higher valuations.
Why these three? Because with Microsoft being the No. 2 cloud player by market share (Amazon is No. 1, Alphabet No. 3), these are those you should consider as MSFT’s peers. BABA also has a cloud business. And while it’s true all three have a higher growth rate than Microsoft, it’s also true that we can justify a higher growth rate for MSFT.
Reason being, Microsoft’s high-growth businesses are starting to make up a bigger slice of the overall revenue pie. As these grow and become a larger portion of Microsoft’s sales, overall sales growth begins to accelerate. Provided margins hold steady or perhaps even expand, this will drive revenue and earnings growth higher. That’s why it justifies a higher valuation, which is what we’re seeing today as MSFT stock price rallies.
Can this catalyst drive MSFT stock price to $86? Some say yes.
Estimating MSFT Stock Price
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If the broader market cooperates and the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) can continue to power higher, I think MSFT stock price could hit $80 in the near term. Even though it’s technically in overbought territory (blue oval on the chart), momentum remains strong with Microsoft stock.
While no longer sporting a monstrous yield, Microsoft stock dividend does pay out 2.2%. Although not comparable to an AT&T Inc. (NYSE:T) or a Verizon Communications Inc. (NYSE:VZ), it does top its cloud-based peers, as well as Oracle Corporation (NYSE:ORCL) and Apple Inc. (NASDAQ:AAPL).
In the shell of a nut, there’s a lot to like about Microsoft. It’s cheaper than its peers and yields more than them, and its high-growth businesses are justifying the stock’s rise.
Still, for as much as I like Microsoft stock, it’s hard to wake up on Monday and be a buyer at these levels. I would rather wait for a pullback before getting long. If I’m not long and it continues to run into earnings, I’d rather take my chances and wait. If it doesn’t pullback or consolidate after the earnings report, at least we know the story is still going well.
The charts indicate $76 should be short-term support. The 50-day moving average and the low- to mid-$70s should also be strong support.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
