On November 5, 1999, co-founder and then-CEO Bill Gates got the news: Microsoft (NASDAQ:MSFT) was considered a monopoly. By the time the government was done with Microsoft and the tech bubble had burst, it took MSFT stock more than a decade to recover and hit new highs.
Granted, it was a nearly impossible string of unfortunate events for Microsoft. A tech boom-and-bust, a monopoly ruling and the Great Recession all tied in with a company that didn’t nail certain key developments and themes in tech.
The ones that did nail those themes? Well, now they’re on the hot seat for potential antitrust violations.
No Antitrust Worries for Microsoft Stock
The Department of Justice is looking at search, social media and online retail services. In investors’ eyes, search translates to Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG), social media translates to Facebook (NASDAQ:FB) and online retail translates to Amazon (NASDAQ:AMZN) and possibly Apple (NASDAQ:AAPL).
So we have four out of the five largest U.S. companies being investigated for antitrust practices. Yet, the largest of them all — MSFT stock — isn’t in the government’s cross hairs. After Facebook posted earnings last week, the company settled one FTC probe with a $5 billion fine. Then, investors found out the agency and the Justice Department are both still investigating the company in separate instances.
There’s no telling what the DOJ will decide and how it will affect these companies. We know Amazon is not in the good graces of the administration, while Google isn’t exactly the coziest either. But we do know one thing at the moment: While business continues to hum along for AMZN, AAPL, GOOGL and FB, they now carry antitrust/regulatory risk.
Microsoft doesn’t and that may make it the safest play in big tech.
Valuing Microsoft
MSFT stock may command a $1.07 trillion market cap, but based on the financials, it’s not all that expensive.
Analysts expect Microsoft to earn $5.22 per share this year. That’s up ~10% year-over-year and leaves MSFT stock trading at about 26.8 times this year’s estimates. Some may say that’s a high valuation for this type of growth. On paper, it is.
But Microsoft stock deserves a premium for several reasons. One is that this is a high-quality company with a number of business segments which integrate nicely together and offer various solutions to large enterprises. These businesses — Azure, LinkedIn, Office, etc. — have diversified Microsoft, giving it an attractive blend of secular and cyclical growth.
Another reason is that the company largely sidesteps much of the trade war and most of the tariff issues plaguing other companies. A third reason (and not to sound like a broken record), but it doesn’t carry regulatory risk like its peers do.
Fourth, estimates call for stable revenue growth this year and next year, with forecasts calling for 11.1% growth in 2019 and 2020. Lastly, analysts expect an acceleration in earnings growth in 2020, up to 13.4%.
The overlooked gasoline on the fire though? Cash flows.
MSFT stock boasts $52.2 billion in trailing operating cash flow and more than $38 billion in free cash flow. Over the past year, those are up 19.5% and 15.7%, respectively.
Only Apple has higher cash flows and only Amazon has faster cash-flow growth. But none of Microsoft’s peers have its unique combination of enormous cash flows and cash-flow growth.
Its balance sheet is strong, too. Total current assets of $175.5 billion are more than twice the size of total current liabilities; Total assets of $286.5 billion are more than $100 billion its total liabilities.
Trading MSFT Stock
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The stock market was struggling when we got the Microsoft news regarding its earnings results. The quarter was strong, but MSFT’s share price had been too. The shares barely eked out a gain, closing just above the 20-day moving average.
That candle is important, though. While Microsoft stock didn’t inspire bulls by giving up nearly all of its intraday gains, it held a key moving average that has been a better buying opportunity than selling opportunity so far in 2019. Better yet, by falling so hard after the print, it gave investors a low-risk entry.
Check out the purple arrow on the chart above. After breaking then reclaiming the 20-day moving average in the prior session, Microsoft stock buyers were able to buy the post-earnings action and use a break below the prior day’s low as their stop loss. Intermediate term investors could have used a close below the 50-day as their stop.
In any regard, what do we do now?
MSFT stock can continue to grind up along channel resistance (blue line) and is now north of $140. I think this name remains a buy-on-dips until proven otherwise. The 20-day and 50-day moving averages are good buy zones to target.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell was long AAPL, AMZN and GOOGL.
