Is Microsoft Corporation Seeing a Top in Facebook and Selling $240M Stake?

After consolidating, MSFT could be a fine long-term buy at $79

By Bret Kenwell, InvestorPlace Contributor
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Did you know that Microsoft Corporation (NASDAQ:MSFT) bought a $240 million stake in Facebook Inc (NASDAQ:FB) a decade ago? Microsoft now says it plans to realize some of the gains in its equities portfolio. What does this mean for MSFT stock price?

While Microsoft management didn’t specifically say it would sell any or all of its FB stake, “reading between the lines” suggests that’s the case. At the time, MSFT beat out others — including the since-renamed Alphabet Inc (NASDAQ:GOOGL) — to invest in FB and garner a 1.6% pre-IPO position. In hindsight, it’s funny to think that management actually had to defend that move at a time Facebook was valued at $15 billion.

Now? FB sports a market cap of $521 billion.

What Does FB Mean for MSFT Stock?

By paring back previous equity investments, Microsoft can add those gains to the bottom line. If Microsoft were holding its full position in Facebook, it would be worth billions.

It still might be worth billions, as FB stock is up more than 350% since its 2012 IPO. But Microsoft sold some of its stake in that initial offering and again in 2014. Should the company continue to pare back its holdings in Facebook and others, it would give a boost to its operating income. That boost in operating income could nicely pad the company’s earnings per share.

Now let’s be clear. Microsoft is a $640 billion company. Its major earnings generator is not through sales of earlier investments. But by realizing these gains, it adds padding to the company’s earnings power. In combination with a stock buyback, MSFT could pave the way to countless earnings beats by shedding off some of these positions and reducing the shares outstanding. It’s something to keep in mind when evaluating its future growth profile.

That’s Not the Only Reason to Buy MSFT

While this strategy could help boost earnings, it wouldn’t do any good if Microsoft’s core businesses weren’t doing well. Specifically, cloud continues to power higher. Intelligent cloud sales jumped 13% while Azure climbed 90%.

In the same period last year, Azure sales more than doubled. So clearly there is a deceleration here. But let’s not forget just how impressive 90% still is. Let’s make it simple: If Azure revenues were $100 million in 2015, 2016 came in at $216 million (up 116%). Now with 90% growth, that puts revenue at $410 million. See how fast that compounds as we went from $100 million to $410 million in just two years? Imagine that growth figure slows to 65% next year. We’re still talking about incredibly strong growth on an increasingly larger base.

With  legacy businesses still turning out decent growth, Microsoft has platforms that began small and are now starting to boom. CEO Satya Nadella has built an incredible company and one that will leverage the cloud with remarkable efficiency. Unlike Alphabet and, Inc. (NASDAQ:AMZN), it doesn’t need the analytical business from, Inc. (NASDAQ:CRM). It can do it on its own.


As these businesses make up a larger portion of the pie, they will drive Microsoft’s overall revenue growth higher. Don’t forget about other areas, like artificial intelligence and data center, as Microsoft looks to diversify into these high-growth segments too. Could Microsoft garner a higher valuation as a result? I think it should and ultimately will.

Trading MSFT Stock Price

chart of MSFT stock price
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So is Microsoft calling a top in Facebook? Not necessarily. But it’s an interesting development — both for MSFT’s bottom line and the FB stock price. In any regard, how do we trade this puppy?

We have long been a fan of Microsoft, constantly calling it a buy-on-dips name. With solid growth and a reasonable valuation compared to its peers, there was no reason to bail on MSFT stock. That theory remains true today, even with shares up 34% already  on the year. And while not huge, the 2% dividend yield is also a nice touch.

By consolidating in the low-$80s, MSFT stock price has worked off its overbought condition, (blue circle), Should short-term support at $82.50 fail, MSFT stock price could “fill the gap” and drop to $79. Its 50-day moving average should also come in as support near this level. For those looking to add, $79 would seems like a prime spot. For those already long, MSFT looks like a solid hold.

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.

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