Despite strong earnings results, the tepid rally in Microsoft (NASDAQ:MSFT) wasn’t adequate enough to elevate the stock amid a barrage of market-wide selling pressure. Instead, we saw Microsoft stock tumble from an October high of $116 down to $100.
However, the charts are setting up for a possible breakout, giving investors some optimism. Even better, its fundamentals are strong. I’m not a day trader, nor am I purely a fundamental investor. But I like to find a good company, be it one with strong cash flows and a low valuation, or one operating in the midst of a strong theme, that also has a strong-acting stock.
You know the old saying, “good company, bad stock?” That means the business is good, but the market is punishing the stock for something; It’s out of favor, the industry is struggling, rates are rising, whatever. However, the goal is to find securities that are both good companies and good stocks.
Microsoft is one of them.
Valuing MSFT Stock
Over a year ago, when MSFT was trading in the $70s, I pointed out two reasons why the name was poised for more upside. Those catalysts were (and are) artificial intelligence and cloud computing. CEO Satya Nadella has successfully pivoted the company from a story about Windows and a failed smartphone to one of strong growth.
Azure continues to log revenue growth north of 75%, as Microsoft has become the second-largest player in the cloud. Industry experts expect plenty of growth to continue in the cloud, as more and more services and efficiencies are realized.
While that will benefit everyone from Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) to Twilio (NYSE:TWLO) to Salesforce (NYSE:CRM), Microsoft will also be a big winner.
Back in the fall of 2017, we also talked about multiple expansion. Now I don’t typically care for that argument, because it relies on investors suddenly valuing a company at a higher valuation. In other words, even if Microsoft’s operations improve, there’s no guarantee the valuation will expand.
With Microsoft stock had a number of high-growth but somewhat small revenue drivers, though. As those segments became larger the valuation would climb, since Microsoft’s revenue momentum remained strong.
As such, analysts are looking for revenue growth of almost 13% this year, a fiscal year that Microsoft just began, and almost 11% next year. On the earnings front, expectations call for 15% growth in fiscal 2019 and 13.3% in 2020. Estimates call for earnings of $4.45 per share this year, after standing at just $4.28 a month ago.
24 times this year’s expectations isn’t cheap, but it’s cheaper than many of Microsoft’s peers. Admittedly MSFT has slower growth, but it also has a much stronger business than most of its peers.
Trading Microsoft Stock
Click to Enlarge
The stock just couldn’t hold up amid the barrage of selling in the market last month. The good news is though, Microsoft stock is showing signs of strength. It closed just over downtrend resistance, though admittedly not in a convincing manner, and just below the 21-day moving average.
If MSFT stock can hurdle this mark, shares can really hit the gas. Over the 50-day and MSFT can retest its prior uptrend (blue line), although it will likely need the cooperation of the overall market to do so. Notice too how the MACD is starting to turn bullish (blue circle).
While Apple (NASDAQ:AAPL) is heading down toward its 200-day moving average and Amazon (NASDAQ:AMZN) is below it, Microsoft stock is still well above its 200-day mark. Should we get more selling pressure though, the area between the 200-day and $102 should continue to act as support.
On a dip down to this mark, I would also mark MSFT stock as a buy up to and even a little beyond $107.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long CRM, GOOGL and AMZN.
