After a successful 2019, where will Microsoft (NASDAQ:MSFT) stock go in 2020? Microsoft saw successes that included winning a prized cloud contract and becoming the second company to achieve a $1 trillion-plus market cap. For these reasons, I even argued that the company deserves inclusion in the FAANG group of equities.
However, the stock has seen a massive run-up in 2019. Moreover, I see few catalysts that can push it higher in 2020. These reasons may cause price growth to pause or turn negative, and I would now wait for a pullback before adding to positions in MSFT stock.
In early November, I urged investors to buy Microsoft stock while it was still a buy. Since that time, the MSFT stock price has increased from about $144 per share to today’s levels of over $155 per share. Year-to-date, it has risen by more than 55%.
Indeed, Microsoft is a far cry from the company that made the “$400 billion mistake” by not beating Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) in creating an Android-like operating system. But is it still a buy?
MSFT Stock Trades at a Fair Valuation
At this stage, I would consider MSFT a fairly valued stock. I do not recommend selling at the current price, nor would I add to current positions. The forward price-to-earnings (P/E) ratio that stood at 23.7 in early November has risen to about 25.6. That further exceeds S&P 500 averages, but falls short of the historical average valuation for MSFT stock.
Also, analysts believe it can produce a 14.5% annual profit increase on average for the next five years. Investors should consider this an impressive feat as double-digit earnings growth is difficult for a company with a $1.18-plus trillion market cap.
I have more mixed feelings on the payout. On the bright side, I like the 15 straight years of dividend increases, and the latest dividend hike came in the most recent quarterly payout. However, the yield of about 1.3% falls well below S&P 500 averages.
I give a slight edge to Microsoft on its balance sheet. Given the recent troubles at Johnson & Johnson (NYSE:JNJ), it has become the stronger of the two companies that still maintains a AAA credit rating. Moreover, according to the latest earnings report, it holds $136.64 billion in cash, giving the company vast control over its destiny. For these reasons, I consider MSFT stock the safest individual equity trading in the U.S. today.
MSFT Has Few Obvious Catalysts for 2020
On the business front, MSFT stock ended 2019 with a big win. Despite protests by Amazon (NASDAQ:AMZN), Microsoft won the $10 billion Department of Defense contract for the so-called “war cloud.” Unfortunately, I see fewer reasons for optimism in 2020. I do not share the confidence of my colleague Brad Moon on Project Scarlett. The year 2020 will see product releases involving non-core products with a history of mixed success.
While the next-generation Xbox will come out, gamers have increasingly turned to smartphones and tablets for convenience. Conversely, they tend to use PCs when optimal performance is the priority. Given this situation, I do not see how consoles will sell well as they hold an uncertain position in the current gaming world.
The other product releases involve updated versions of the Microsoft Surface. Specifically, this will include multi-screen devices such as the Surface Duo and Surface Neo. This PC succeeded for Microsoft after several of the older versions failed to take off with consumers. Still, even if this version sells well, it remains unclear how this might boost MSFT stock. After a great 2019, I think MSFT may take a breather.
The Bottom Line on Microsoft Stock
MSFT stock looks poised for a pause or a slight drop after a successful year. Microsoft saw a rally of more than 55% in 2019. It benefited somewhat from a recovery from 2018’s massive decline. MSFT also topped it off by winning the contract for the war cloud.
However, it will begin 2020 with a somewhat-elevated multiple. Moreover, its product releases involve non-core products that could meet with struggles.
As I mentioned before, I see MSFT as arguably the safest individual equity to own. I also predict continued success for the company and holders of MSFT stock. Still, if you want to buy, wait for a pullback.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
