Oftentimes, the bears will point to Microsoft (NASDAQ:MSFT) stock as a representative of an overheated market. It’s true: Microsoft shares have made astounding gains during the recovery from the financial crisis. Yet, the coronavirus from China has pounded the stock price.
Gauging the impact of the coronavirus is extremely difficult. The market’s function is to try to absorb all of the available information. Then it has to make an attempt at price discovery.
Now traders have to ask themselves a question: Is Microsoft stock correctly priced?
Supply and Demand Shocks
Microsoft is headquartered in Redmond, Washington. However, like many American tech companies, Microsoft relies on Chinese factories to produce the parts for its electronic devices. You might recall when Apple (NASDAQ:AAPL) announced that the coronavirus outbreak had disrupted the company’s iPhone production.
As a result, Apple had to concede that it won’t likely meet its previously established financial guidance for the second quarter. But it wasn’t just a matter of a supply-chain shock. Apple also warned that demand for iPhones in China, a huge market, had decreased. This is because the Chinese retail stores had either reduced their hours of operation or shut down completely.
This started a chain reaction in the market as Apple is considered a bellwether stock. Traders wondered (and rightfully so) whether other famous tech names were having similar problems. They would soon receive the answer in a bombshell press release from Microsoft:
“[T]he supply chain is returning to normal operations at a slower pace than anticipated at the time of our Q2 earnings call. As a result, for the third quarter of fiscal year 2020, we do not expect to meet our More Personal Computing segment guidance as Windows OEM and Surface are more negatively impacted than previously anticipated.”
Assessing the Impact
In other words, we can basically throw the originally issued third-quarter revenue guidance of $10.75 to $11.15 billion for Microsoft’s More Personal Computing segment out the window. To make matters worse, Microsoft didn’t specifically assess the extent of the fiscal damage.
How badly was the supply chain disrupted? We don’t know.
To reiterate an earlier point, it’s not only a supply-side issue. Just as Apple has suffered from a decrease in demand for its products in China, Microsoft is surely facing a similar problem. It would be constructive for Microsoft to address this issue. However, they have yet to do that in a satisfactory manner.
On top of that, Director of Identity Security Alexander Weinert warned Microsoft users of 0.5% of enterprise accounts being potentially compromised. That’s around 1.2 million Microsoft accounts. Weinert admitted, “That’s a really … high number … If you have an organization of 10,000 users, 50 of them are going to be compromised this month.”
In light of these issues, there’s no way to know whether the market has fully priced all factors into Microsoft stock. Investors have certainly pushed the price down. However, as the bad news sinks in, there could easily be another wave of selling ahead.
The Takeaway on Microsoft Stock
Equity markets tend to be fairly efficient. This theory will be tested when it comes to Microsoft, though. Prospective investors should view the current state of affairs as a wait-and-see type of situation. There’s no need to jump in while the market is still assessing the damage.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets. As of this writing, he did not hold a position in any of the aforementioned securities.
