After taking it on the chin like the rest of the stock market, Microsoft (NASDAQ:MSFT) has quickly found its footing. Investors did exactly what they should have and are diving back into high-quality companies. That’s resulted in a 30% rally for Microsoft stock over the past month.
Unfortunately, such a move can make it difficult to buy even a high-quality name like Microsoft, especially ahead of earnings. Add in the pandemic caused by the novel coronavirus and it becomes even more difficult.
Let’s take a closer look at Microsoft stock ahead of earnings, which are scheduled for after the close on Wednesday, April 29.
Maintaining Momentum
Microsoft’s balance sheet is too powerful to ignore. That’s one reason some were pounding the table on Alphabet (NASDAQ:GOOGL) and Facebook (NASDAQ:FB), (both of those stocks will report earnings this week, too). It shouldn’t go unnoticed that these companies have some of the strongest balance sheets in the market. Not only does that give them flexibility amid downturns, but it also gives them staying power. They can ride out the economic storm for however long it may last, even though the stock market may make it seem as though there’s nothing to worry about.
Further, during times of heightened panic and stress, investors must buy into certainty. We know the business model for Microsoft isn’t going away, with many of its units benefiting from secular growth themes. Here’s a note from the Wedbush analyst team, which remains “firmly bullish.” They said:
“Heading into earnings we believe the lion’s share of investors are looking past headline March results/June quarter when buying the stock at these levels with more of a laser eye on the underlying Azure cloud pipeline and Office 365 growth trajectory over the next 12 months.
To this point, we believe Azure’s cloud momentum is still in its early days of playing out within the company’s massive installed base (current environment a potential catalyst to cloud shift) and the Office 365 transition for both consumer/enterprise is providing growth tailwinds over the next few years.”
Let’s put it this way. Consensus earnings estimates for the quarter have gone from $1.24 per share 90 days ago, up to $1.28 per share currently. They still expect double-digit earnings and revenue growth this year and next year, too. Even though the market’s under pressure, Microsoft feels like a bargain if it can deliver.
Trading Microsoft Stock
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While it’s painful to have missed such a big rally, investors had time to buy Microsoft stock. Shares broke down from $190 in February to $132.50 in March, sliding 30.3% from peak to trough.
I was hoping that $140 would act as stout support on the dip, as this was multi-month resistance in 2019. However, Microsoft shares ultimately broke through this mark, consolidating in the mid-$130’s and hammering out an impressive bottom.
Since then, shares have been roaring higher, recently topping out near $180 after retracing ~80% of the decline. If the post-earnings reaction is bearish, let’s see if Microsoft stock finds support near the 20-day and 50-day moving averages, currently between $163 and $165. Below that puts $160 in play, followed by the 200-day moving average.
On the upside, I want to see if MSFT can reclaim $175 and take out the April high around $180. Above that also puts Microsoft over downtrend resistance, putting the 52-week high near $190 in play.
I don’t know how Microsoft stock will trade before or after earnings. However, this company clearly has momentum. Whether that’s in its cloud unit, Teams platform, the stock price or its earnings and revenue growth. A dip is likely one to buy, provided there’s not some very negative news in the release.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
