Big tech has been on fire lately and Microsoft (NASDAQ:MSFT) is no exception. MSFT stock and Apple (NASDAQ:AAPL), the only trillion-dollar entities in the U.S., continue to blaze higher on a seemingly regular basis.
This has many investors wondering if the stock has been too hot. Similarly, it’s got those who missed the move wondering if now is too late to buy the stock.
In short, it’s got longs, shorts and those on the sidelines confused. Let’s look at each case as we near the end of 2019.
Buy MSFT Stock
Buying MSFT stock is definitely the bandwagon pick. Of the 34 ratings on Wall Street, 27 of them consist of “buy” or “strong buy.”
The most recent rating making some noise comes from Wedbush, who maintained their “outperform” rating but upped their price target from $170 to a Street-high of $185. If MSFT can get there, it will represent a ~20% rally from current levels and swell its market cap to more than $1.4 trillion.
Further, forecasts call for double-digit earnings and revenue growth in fiscal 2020 and 2021. The company’s recently-won JEDI contract with the Pentagon gives it a nice boost, but many analysts believe it will lead to even more momentum in its cloud business.
Finally, MSFT stock boasts a heavyweight balance sheet. As of the most recent quarter, Microsoft had cash and short-term investments of $136.6 billion. Not many can compare to that size, save for something like Apple — which has a huge buyback commitment — or Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG), which had $121.7 billion in cash in its most recent quarter.
Hold Microsoft Stock
Making the case to hold MSFT stock is an easy one, quite frankly. When a stock continues to churn to new highs, it’s hard to call it a sell — what if it keeps going up? At the same time, it’s hard to call it a buy after such a big move.
While Microsoft has a huge cash hoard, it does have more than $66 billion in long-term debt. Make no mistake, given its robust free cash flow, Microsoft’s balance sheet is still a powerful asset. But compared to a company like GOOGL, which has just about $4 billion in long-term debt, its cash balance doesn’t reveal everything.
The bull case lays out double-digit revenue and earnings growth. However, it doesn’t mention that it’s barely double digits. Revenue estimates call for 11.5% and 11.3% growth this year and next year, while earnings growth expectations sit at 13.5% and 12.4%, respectively.
This isn’t a knock on Microsoft’s growth, as it’s certainly solid. But it’s about one-third the growth rate of Alibaba’s (NYSE:BABA) revenue estimates and half of its earnings expectations. It also comes up well short of revenue growth estimates for Alphabet, which stand at 18.9% and 17.9% for the same periods, respectively.
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Lastly, let’s look at the chart. Shares started off 2019 with a bang, like much of the market did. After consolidating for several months, MSFT stock price eventually broke out over $140 resistance in late October.
While the charts do not lean bearish — making MSFT stock hard to sell — it’s difficult to buy with the stock just below all-time highs and sporting an elevated RSI reading. In short, Microsoft stock looks just a bit overheated. Investors may prefer to wait for a pullback in order to buy the dip.
Sell MSFT
After reading about the solid growth, powerful balance sheet and buy-the-dip look on the chart, what reason could investors possibly have for labeling MSFT stock a sell?
With shares up more than 52% so far in 2019, some may feel that adding almost $400 billion to Microsoft’s market cap is too much in one year. Others may also feel that the valuation is becoming less attractive.
MSFT stock price trades at almost 29 times this year’s earnings estimates. While not overly expensive compared to some stocks, this is a larger premium than Microsoft tends to command. It may also make others — like GOOGL or BABA — look more attractive, given that they have better growth and a lower valuation.
The Bottom Line
At the end of the day, it’s hard to be a pound-the-table buyer on MSFT stock, with shares a bit overextended and up 52% so far this year. On the flip side, a strong balance sheet, double-digit revenue and earnings forecasts for this year and next year, and a strong chart make it a tough one sell short.
In my view, MSFT stock is a hold at the moment, and a buy-on-dips candidate amid a pullback. The only selling I would consider as a long, would be partial profit taking, and perhaps rolling the proceeds into similar large-cap tech plays if investors feel they present better value.
Until then, the trend is your friend.
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 and GOOGL.
