Microsoft (NASDAQ:MSFT) isn’t immune to fears about the tech sector. There has been little Microsoft news since MSFT reported its earnings in April, yet Microsoft stock has fallen 4% since the end of April.
The catalyst appears to be recent broad market weakness. And the announcement of DOJ and FTC investigations into Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL) hasn’t helped tech stocks, including MSFT stock.
Of course, Microsoft stock shouldn’t be affected by the probes. The company already had its bruising battle with U.S. antitrust regulators. But that’s kind of the point: with MSFT stock around $120-$130, It hasn’t that taken much to knock Microsoft stock down. That in turn, suggests that it will take quite a bit for MSFT stock to rebound, and that it’s going to be difficult for MSFT to move past its recent highs any time soon.
The Trillion-Dollar Curse and MSFT Stock
MSFT stock gained nicely after its blowout fiscal third-quarter report in April. The jump following that strong Microsoft news moved the market capitalization of MSFT stock over the $1 trillion mark, making it the third company to reach that level.
So far, reaching $1 trillion has proven to be a negative forward indicator. Apple (NASDAQ:AAPL) was the first company to breach that level back in early August. AAPL stock would keep rising, but within two months it started a descent that wiped out one-third of its market value. AAPL now has a market cap closer to $850 billion.
Amazon.com (NASDAQ:AMZN) hit the $1 trillion mark a month later. Its stay was much shorter, and it, too, would tumble amid the fourth-quarter market rout. An effort to retake the level this year failed, and the stock now is down 10% from the levels it reached after an earnings beat of its own. GOOGL stock has come close to $1 trillion twice, only to pull back sharply each time.
This all may be coincidence. It’s not really a surprise that the market’s largest stocks soared when investors were optimistic and pulled back when they weren’t. Round market-cap numbers, meanwhile, shouldn’t mean anything in the context of detailed fundamental analysis.
Still, it’s at least possible that there’s a psychological effect associated with the $1 trillion level. It’s a valuation that sounds huge (and is huge), and it’s a figure that suggests that pretty much everything should be going right for a company. And so, once a stock reaches the $1 trillion market-cap plateau, any signs of weakness might be amplified, and investors might be more willing to take profits.
Microsoft News Since $130
Whatever the cause, even before MSFT’s recent weakness, investors seemed unwilling to pay more than $130 for MSFT stock, a level that’s almost exactly in-line with that $1 trillion market capitalization. But there are also fundamental reasons why that ceiling seemed to stay in place.
It’s true there’s been little Microsoft news since its earnings, but that’s kind of the problem. Microsoft stock wasn’t cheap at $130, as it was trading at something close to 25 times analysts’ average 2020 EPS estimate after backing out its net cash. Solid earnings are helpful. But for MSFT stock to rally, Microsoft needs to report a blowout quarter, the kind that drives optimism for a long stretch and suggests a fundamental change in the company’s growth trajectory.
MSFT’s Q3, as solid as it was, wasn’t quite that good. This still is a company whose underlying earnings (before the impact of share repurchases) are growing slightly less than 10% annually. Even in a bull market, and even for a tech giant, it’s tough to justify much more than a mid-20s P/E multiple with that type of growth.
To be fair, Microsoft has rolled out a few new initiatives. Its partnerships with BMW (OTCMKTS:BMWYY) and insurer Willis Tower Watson (NYSE:WLTW) highlight the growing role of Microsoft’s new technology. InvestorPlace columnist Luce Emerson has highlighted the company’s new gaming offerings.
None of those efforts will really move the needle, however, so investors are paying a mid-20s multiple on MSFT stock for 10% growth at most. As a result, MSFT’s earnings multiples and Microsoft stock probably won’t rise much.
Between the trillion-dollar market cap problem and the high valuation, expecting more than $130 from MSFT seems optimistic.
As of this writing, Vince Martin has no positions in any securities mentioned.
