The fourth quarter of 2018 was tough for many investors. However, shares of Microsoft (NASDAQ:MSFT) were holding up pretty well as of the beginning of December. MSFT was holding its own despite big declines in other large-cap tech stocks. MSFT stock was down just 2.5% from its highs with one month left to go in the year.
Unfortunately, Microsoft couldn’t escape 2018 without a fight. MSFT stock went from $112 at the beginning of December to a monthly low of $94 before finishing the year near $100.
One could argue that MSFT stock did not deserve the 16% intra-month decline. And with MSFT near $99 currently, bulls could make a case that MSFT doesn’t deserve to be down some 14% from its highs. On the other hand, MSFT has fared far better than the shares of Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) and Apple (NASDAQ:AAPL) have, so it’s hard to make too much of a fuss about Microsoft’s decline.
In fact, because Microsoft stock has held up so well compared to its peers, it now has the highest market cap in the U.S. MSFT now has a market cap of $757 billion, putting it about $25 billion ahead of second-place Amazon.
Valuing MSFT Stock
Valuation is one of Microsoft’s strengths. Trading at 22 times this year’s earnings, MSFT isn’t exactly cheap, but it’s far from expensive, particularly given the company’s fast-growing cloud-computing segment and its peers in this space.
MSFT is second in cloud market share, behind Amazon and ahead of Alphabet. That’s not bad company to have, nor is it bad to have the lowest valuation among the trio. That said, MSFT is also growing more slowly than Amazon and Alphabet. But the owners of MSFT stock are likely willing to sacrifice some of that growth for Microsoft’s stability, which has been on prominent display during this correction.
Analysts, however, do expect Microsoft’s sales to grow 12.7% this year and another 10.5% in 2019. On the earnings front, it’s a similar story, with analysts expecting 14.4% growth in 2018 and 13.3% growth in 2019. It’s always a positive sign to see earnings growth outpace sales growth and for both metrics to exceed 10%.
Double-digit sales and earnings growth, a reasonable valuation, and blue-chip tech status aren’t the only positive aspects of Microsoft stock. It also has an excellent balance sheet.
With $135.5 billion in cash and short-term investments and $257.6 billion in total assets, Microsoft is a behemoth that many may underestimate. And with $32 billion in trailing free-cash flow, MSFT has more than enough muscle to fund its stock buyback, make beneficial M&A deals, and pay down its debt.
Also, don’t forget Microsoft’s 1.8% dividend yield.
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It was discouraging when Microsoft stock fell below $102, as this level was support multiple times in October and November. Trading around $99, MSFT is now resting slightly below its former support.
If Microsoft is able to push higher, look to see if it can climb above $102 and its 200-day moving average around $103. If not, those points are likely to act as resistance and MSFT stock will drop further. Bulls’ next best bet will be to see Microsoft stock put in a higher low. A less-ideal situation involves a retest of the $94 level, while new lows would be a worst-case scenario.
But it would be hard not to buy MSFT if it reaches the low-$90s.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long AAPL, AMZN and GOOGL.
