Tech stocks have been under fire over the past few days and Monday was a great highlight of that fact. The PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) fell 2%, despite a late-session rally while bulls are growing tired of buying the dip amid continued trade-war rhetoric. Investors with a watchlist have likely noticed Microsoft Corporation (NASDAQ:MSFT), as MSFT stock has weathered the storm pretty well, but is now below $100.
Is it time to bounce?
One of the biggest reasons I like Microsoft so much? It’s vision. By that I mean the direction that CEO Satya Nadella has taken the company.
Microsoft is aimed squarely at the cloud world, with its Azure platform growing sales by more than 90% for 10 straight quarters. The segment continues to crush it and as it makes up a larger and larger piece of the overall revenue pie, it will help accelerate overall revenue growth. This should warrant a higher valuation, something we’ve seen come to fruition over the past few quarters.
The cloud industry seemed to lose some of its luster last year, in my opinion. In late 2016 and early 2017, it wasn’t driving big companies as much. Now, though, we’ve seen a resurgence of the cloud, as big companies see ballooning revenues from this still-young industry.
Valuing MSFT Stock
Microsoft is among these companies and, conveniently, has one of the lowest valuations compared to its peers. In the large-cap cloud space there are names like Alibaba Group Holding Ltd (NYSE:BABA), Amazon.com, Inc. (NASDAQ:AMZN), Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and Salesforce.com, inc. (NASDAQ:CRM).
AMZN and CRM — the latter of which provides analytics for Google and Amazon — have really high valuations. BABA has a higher, but reasonable, valuation given its high growth rate. Its growth is superior to that of MSFT and that goes for both revenue and earnings. MSFT has a similar valuation to GOOGL on an earnings basis, despite the latter having better growth.
As we branch out to include smaller companies like Workday Inc (NASDAQ:WDAY), Box Inc (NYSE:BOX), Red Hat Inc (NYSE:RHT) and others, the same remains true. While Microsoft may have an inferior growth profile, it’s got a superior valuation. Further, in most cases, MSFT has a stronger balance sheet and higher dividend yield.
At this point, it’s worth mentioning that MSFT stock trades at about 25 times this year’s earnings. That’s roughly in-line with GOOGL. While MSFT has traded much better this year, choosing between the two would likely leave me siding with Google.
In any regard, we don’t have to settle for one or the other. The simple truth is that we can own both (and more) and these are two of the cheapest, biggest players in the cloud industry. In fact, Microsoft and Google Cloud are No. 2 and 3, respectively, just behind Amazon. If investors want exposure to the segment, these are some of the cheapest plays out there. It helps that they’re high quality, blue-chip tech stocks.
Trading MSFT Stock
Over the past 12 months, MSFT stock has been in a pretty solid uptrend. In fact, the 100-day moving average has been an excellent proxy on when investors should buy the dip. In that regard, it reminds me of Salesforce, which has been a buy every time it hits this mark.
So, what do we have with MSFT stock? It’s pretty clear and I don’t want to overcomplicate it. Microsoft is a buy on a retest of its 100-day moving average, currently near $94.
What happens if that level fails? Short-term traders can cut their losses and wait for a better setup, while longer term investors can consider adding near $88. Ironically, that’s where the 200-day moving average comes into play, a level that MSFT hasn’t touched since January 2017.
Every trend eventually ends. I don’t know if the trend is still our friend or if it’s about to bend. But at this point, I have no reason to bet against it.