It’s been a nice run. But when it comes to today’s Microsoft (NASDAQ:MSFT), are shares still worth buying? Let’s look at what’s happening off and on the MSFT stock chart, then offer readers a strategic, risk-adjusted recommendation to compliment a market where the clock is always ticking.
Yes, Wall Street is scarily upbeat these days. Led by the tech-heavy Nasdaq Composite, gains of nearly 25% in 2020, a rally upwards of 70% since the March Covid-19 bottom, and seemingly daily record highs are verifiable proof.
Business has proven perversely strong for the world’s second-largest company. Amid a mostly destructive pandemic for many companies, the economy, and not to mention American families, Microsoft has flourished. The company’s late July earnings report is confirmation of its wherewithal.
In the face of the coronavirus, Microsoft stock managed to capture sales growth of 13%. Earnings topped Street estimates. While Microsoft’s prized Azure cloud platform slowed by 12 basis points from the prior quarter, growth of 47% during the economic downturn was still undeniably impressive.
To be fair, there were some weak spots buried in Microsoft’s report. That includes revenue guidance for the company’s first quarter which came in modestly below analyst forecasts. But there wasn’t much to really dislike. And if Microsoft’s proposed purchase of China-based social media sensation TikTok’s North American, Australian, and New Zealand operations are realized, there are more reasons to remain positive.
TikTok and Microsoft
A TikTok deal allows Microsoft an important toehold into social media. The platform has been hailed as a crown jewel, and for good reason. The TikTok phenomenon taps into hundreds of millions of users. What’s more, today’s sticker shock of an estimated $50 billion could look downright cheap if sales growth of $1 billion, estimated to jump five-fold by the end of 2021, confirms today’s marriage vows and continues to improve.
If consummated, the purchase would prove a major coup at the expense of Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) and Facebook (NASDAQ:FB). Both companies are wrangling with anti-trust probes and are not in a great position to expand their reach. Twitter (NYSE:TWTR) would stand to benefit from a buyout, but it’s largely seen as being financially constrained.
So, a deal for Microsoft sounds great, right? It does. But there are growth assumptions built into the price tag. There’s also political, practical, and strategic issues that are part of the package, given the U.S.’ current saber rattling with China.
Now there’s surprise competition from Oracle (NASDAQ:ORCL) as well. The enterprise software giant is reported to have talked with TikTok’s parent company ByteDance and legal expertise on the clock looking into its own deal for the outfit.
MSFT Stock Monthly Price Chart
Source: Charts by TradingView
Sometimes things don’t turn out as planned. Microsoft’s ambitions to purchase TikTok could always work out that way. This certainty also happens on price charts used to guide investment decisions. In fact, MSFT stock’s recent flat base breakout is clear evidence of that point.
A good-looking pattern breakout in early August, tied to TikTok/Microsoft blessings from the White House, ultimately proved as good as it would get for investors. An immediate daily gain of 5.62%, which narrowly helped MSFT stock to new all-time-highs, wound up giving way to shares filling the news-driven price gap over the next several sessions.
The moral isn’t that charts can’t be trusted. They’re a tool to be used in an imperfect world. As it relates to Microsoft today, I’d still be inclined to see shares markedly higher by year’s end. Despite the initial technical failure, the stock has held up to form a potentially more durable base-on-base formation nearly two months in the making.
With the larger pattern in hand, a second attempt at breaking out to new highs could be just the sort of technical platform necessary for a larger rally. A leg similar to the March bottom would put MSFT stock up near $275.
That said, an obvious steeper price trend in 2020 is a double-edged sword. Rather than warn investors away from buying Microsoft, I’d simply argue for hedging a stock purchase with a protective options strategy and prevent the possibility of the world’s No. 2 from crapping out inside the portfolio.
Chris Tyler is a former floor-based, derivatives market maker on the American and Pacific exchanges. Investment accounts under Mr. Tyler’s management do not own any securities mentioned in this article. The information offered is based on his professional experience but strictly intended for educational purposes only. Any use of this information is 100% the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits