Back in early November, when I first weighed in on Microsoft (NASDAQ:MSFT), I noted that with its moves to become a leader in the cloud market, it was tough to bet against the shares. In my thinking, Microsoft stock could “easily test $180 a share near-term based on the strength of the cloud market alone.”
That was on Nov. 6, as the stock traded at $143.20. By Feb. 11, MSFT stock was up to $190.
Then, thanks to the coronavirus story, the stock dropped to $155.
While the pullback created a golden opportunity to buy a stand-out tech name, new risks to Microsoft’s Pentagon contract are keeping me on the sidelines. In fact, until there’s clarity on the contract, it’s a good idea just to avoid Microsoft.
The Argument for Near-Term Upside…
Microsoft was among the first of the tech firms to reduce revenue targets on coronavirus concerns. “Although we see strong Windows demand in line with our expectations, the supply chain is returning to normal operations at a slower pace than anticipated at the time of our Q2 earnings call,” Microsoft said on Feb. 25. “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.”
Of course, that was enough to rattle nervous investors.
However, we have to consider this a short-lived event, and that the virus won’t impact Microsoft’s cloud computing business.
In fact, as I noted on Jan. 22, Microsoft is quickly transforming itself into one of the top cloud giants with its Azure cloud business, where sales grew 59% year over year compared to 35% growth for Amazon (NASDAQ:AMZN) Web Services.
Plus, Wedbush analyst Dan Ives says Microsoft is still one of the best opportunities on the market. “MSFT at these levels we view as a golden cloud tech name to own for those willing to navigate the volatility of this “shock event” and see the forest through the trees on this cloud behemoth,” adding, “while this is an unprecedented and fluid situation with the coronavirus outbreak, we remain firmly bullish on shares of MSFT at these levels.”
… and for Near-Term Downside
While Microsoft is a solid long-term bet, it could come under pressure immediate-term should it lose the $10 billion cloud contract for the Pentagon, known as the Joint Enterprise Defense Infrastructure Cloud (JEDI).
At the moment, U.S. Court of Federal Appeals Judge Patricia Campbell-Smith appears to be siding with Amazon “on the merits of its argument that the DoD improperly evaluated” Microsoft’s bid. If the court does side with Amazon, it could easily take the wind of our Microsoft’s sails for the foreseeable future. After all, shares of MSFT have risen nicely on news of this Pentagon deal.
Bottom Line on Microsoft Stock
While Microsoft may be one of the “best opportunities on the market,” it may be best to avoid the stock, at least near-term, until we have further clarity on the JEDI contract issue. If we rush into the stock for the sake of buying at recent lows, we can lose money.
For me, I’m on the sidelines until we have clarity. Don’t rush in just yet.
Ian Cooper, a contributor to InvestorPlace.com, has been analyzing stocks and options for web-based advisories since 1999. As of this writing, Ian Cooper did not hold a position in any of the aforementioned securities.
