Shares of Microsoft (NASDAQ:MSFT) have certainly been on a wild ride over the past several weeks. Microsoft stock briefly entered bear market territory at $152 on Friday, falling just over 20% from the all-time high of $190.70 achieved just a few weeks prior.
Some of the drop was warranted given the overvaluation and coronavirus fears tempering growth. The selling has now come too far, too fast. Time to be a buyer of Microsoft stock.
Valuation View
Microsoft stock is looking much more attractive following the recent drubbing. It is now down 15% from all-time highs from just a few weeks ago.
Shares are also well below the levels they were before the latest blowout earnings report on Jan. 29. EPS came in at $1.51, trouncing estimates of $1.32 per share. Revenues of $36.91 easily outpaced expectations of just $35.69 billion.
It also marked a very impressive 15 straight quarters of earnings beats by Microsoft. Azure cloud growth continues to be impressive, with growth of 62% well ahead of analyst expectations of 58%. The company also said operating margins should improve by 2% and remain relatively stable.
All said, it looks like a solid opportunity to get into Microsoft stock below pre-earnings levels even though earnings were a huge beat. The combination of better earnings and a lower stock price makes for much more attractive valuations.
Technical Take
Source: The thinkorswim® platform from TD Ameritrade
Microsoft reached by far the most oversold levels in the past year until finally firming on Friday. 9-day RSI briefly breached the 25 area before turning higher. MACD was at hugely oversold levels as well. Momentum cratered from an extreme high to an extreme low in the space of two weeks. Implied volatility catapulted to the highest price since the Financial Crisis. Microsoft stock traded a a huge discount to the 50-day moving average, another sign the selling has gone too far.
Most importantly, MSFT had a major reversal day on Friday. After opening sharply lower near $152, Microsoft stock immediately reversed course to close higher on the day at $162.01. This 10-point price swing is indicative that sellers may finally be exhausted and the buyers have taken charge. It is even more powerful given the magnitude of the recent bloodbath in Microsoft.
The sharp pullback has also boosted the dividend yield to 1.2%. This is now above the 10-year Treasury yield of just 1.13%. We are likely near the point where income investors may look to switch from bonds to safe stocks that pay a comparable rate. Microsoft has a payout ratio of just .33, meaning the dividend is very safe. It also has a history of raising the dividend with a 5-year dividend growth rate of 10.9%.
Trading MSFT Stock
I had a decidedly bearish viewpoint in my previous article on Microsoft from Feb. 12. Both the fundamentals and technicals had reached an extreme in my opinion. I looked for Microsoft stock to head back to at least $172, which certainly was the case. Now that MSFT sits at $162, my outlook has become somewhat bullish because price does matter.
Stock traders should look to add Microsoft stock on any weakness. An initial upside profit objective would be a move back to the 50-day moving average at $168. A meaningful break of $150 would be a viable stop out point.
Selling a covered call makes intuitive sense given that implied volatility is near 10-year highs. The April $190 call could be sold versus each 100 shares of stock bought. This would bring in an additional $150 in option premium and position to be a seller of MSFT stock at $191.50.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at timbiggam@gmail.com.
