On the surface, the coronavirus from China seemingly provides an upside narrative for Microsoft (NASDAQ:MSFT). As a “physical” software giant that transitioned to becoming a top player in the Software-as-a-Service (SaaS) space, several of the company’s business units encourage digital transfers of work products, as opposed to face-to-face transfers. Combined with its strength in cloud computing, one may be forgiven for expecting Microsoft stock to receive a reprieve.
To be fair, Microsoft is looking far better than most names. Despite the bloodshed on the March 3 session, Microsoft stock is up nearly 4% year-to-date. In comparison, cloud competitor Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) is just below parity.
Additionally, the Nasdaq Composite index is off 3.9% for the year. Thus, shares seem like a viable contrarian opportunity: it’s down enough to be a discount, but not too far off to cause fears of a meltdown.
In the long run, I expect shares to recover from the malaise that the coronavirus has caused. My confidence rests on the idea that Microsoft stock is levered to multiple relevant catalysts. For instance, everyone knows that video games represent big business. According to data provided by Digital Market Outlook and Statista, by the year 2024, video games revenue in the U.S. will hit $17.2 billion.
In China, that figure will likely rise to $25.3 billion. Therefore, with both Microsoft and rival Sony (NYSE:SNE) scheduled to release their respective next-generation consoles near the end of this year, growth opportunities will abound. It also implies that advantaging a discount in Microsoft stock is a smart move.
But should you make that move today? Here, I’m a little bit skeptical and I’ll explain why.
The Coronavirus Is a Black Swan Event for Microsoft Stock
Before I get into it, I want to reiterate that I’m long-term bullish on MSFT. If there are any folks that are emotionally vested in this company, you’re not going to get much criticism for me.
At the same time, I’m a realist. One of the things that I like to do is to look at the numbers. Right now, they’re not painting a rosy picture regarding the coronavirus.
At the time of writing, there are 93,158 cases with 3,202 deaths worldwide. By the time you read this, this tally will jump toward the 100,000 mark. Particularly worrisome are the rapidly spiraling cases in South Korea, Italy and Iran. These three countries went from having little to no reported cases to becoming the top-three affected nations outside China.
Back home, after President Trump appeared confident in the government’s ability to contain the coronavirus, 122 Americans have been infected with nine deaths.
As the New York Times reported, the coronavirus appears to be more contagious (and deadlier) than most flu strains. Naturally, everyday folks assumed the worst and panic-bought supplies, especially protective face masks (which you can’t find anywhere now).
Still, some insist that the “regular” flu is the bigger threat. Where I think a disconnect exists is that the flu — or any other disease — is allowed to run its course before we collect official data on it. However, the coronavirus has only been around for a little over two months and it has already caused substantial damage. This unknown is the reason I’m hesitant on pulling the trigger on Microsoft stock.
As I’ve mentioned previously, it’s not just the casualties that we must worry about. Instead, it’s the economic damage, especially the broader supply-chain disruption, that casts a dark cloud.
Waiting Is the Smart Call
If you want to grab a small position in Microsoft stock as a “just in case” play, go right ahead. However, I’d encourage investors to keep the powder keg dry.
I think it was very telling that the U.S. Federal Reserve made an emergency interest rate cut on March 3, “slashing the benchmark U.S. rate by half a percentage point.” First, the Fed is not known to make drastic changes to monetary policy because a few Americans have fallen ill. Second and more importantly, the major indices still printed huge streaks of red ink.
It’s a curious dynamic because on the session a day earlier, the markets jumped higher on speculation that central banks will fiscally support the global economy. Here’s the biggest central bank in the world doing exactly that, yet Wall Street apparently didn’t care.
To me, this signals a loss of confidence. Further, the environment doesn’t favor growth names, especially those with multinational exposure. Like I said, I like Microsoft stock, but I also want to be smart about this.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he was long SNE stock.
