The bullish case for Microsoft (NASDAQ:MSFT) in the long run is undeniable. They have been executing on plans almost flawlessly for decades. This is more true now under the leadership of CEO Satya Nadella and the success of MSFT stock price is proof of it. Year-to-date it is up 28% and it hovers around its all-time highs.
Back in May I wrote about its upside potential, and the trade yielded over 10% since then. From a trading perspective it is okay to book some profits up here, but over the long term, it remains a buy-the-dip proposition. They have successfully steered the ship into the new-tech model.
MSFT Stock Is a Winner, But Pick Your Entry Levels Wisely
Today’s note is one of caution, but definitely not bearish or a call to short. The immediate threat for the stock up here is extrinsic. The stock market in general is way too high given that we still have 20 million people unemployed. Yet sentiment on Wall Street is strong, so there is room for a big blindside. There is artificial courage from the Federal Reserve actions.
Federal Reserve Chairman Jerome Powell has committed publicly and boldly time and again that he will use all the weapons at his disposal in order to keep monetary conditions very loose. For as long as this is true, investors have a huge appetite for risky tech stocks.
Microsoft stock is not alone near its all-time highs because the Nasdaq is also there. Within it, there is a rush to buy any web-based business as if they’re all going to be guaranteed winners. This reminds me of the dot-com bubble, so I worry. While Microsoft is worthy, there will be many losers that are getting too much love now. If the stock market falls because of this over-exuberance in froth, then Microsoft will also fall through no fault of its own.
It makes sense for shorter-term investors to trim or lock some profits near all time highs. This is not an obvious place to initiate new longs in MSFT stock. That’s not a slight against the company outlook itself. Fundamentally, it is not cheap with a forward price-to-earnings ratio around 32 and an 11 times price-to-sales, but it is reasonable. This is not like the bloat that exist in many other Nasdaq momentum stocks.
Expensive is Okay When it Doesn’t Mean Bloated
The mega-caps like MSFT, Apple (NASDAQ:AAPL) and the FANG gang are all valued high but not extravagantly so. They could all use a dip to set better footing but they are not a crash waiting to happen. Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) are running hot relative to their own usual levels, but they are not grossly over-valued to the point where they are a short. The exuberance is so strong that sellers can’t even keep FB stock down even when it is under a high profile revolt from its largest advertisers. Such bullishness is hard to short and it could result in terrible pain for the stubborn bears.
I am confident that investors will have better opportunities to engage long with Microsoft stock from lower prices. The outcome of this week is a binary because of the jobs report tomorrow. How stocks will trade on the headline is a coin flip bet. If I’m long Microsoft, I’m not scared enough to get out of it. But I would consider delaying any new positions until next week.
Betting against the equities is hard. As they say “don’t fight the Fed” — especially one this bullish — and “don’t fight the tape” — especially when it’s driven by extremely positive sentiment on Wall Street in spite of extremely terrible global macroeconomic conditions.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities.