Microsoft (NASDAQ:MSFT) remains a very good bet for longer-term investors. Its cloud business remains strong and should greatly benefit from its huge government contract, while MSFT stock is poised to continue getting a boost from the work-from-home trend.
Still, I agree with other InvestorPlace columnists who recommend that investors wait for a deeper pullback in the shares before buying them. Recent sales by two important company insiders leave me more convinced of the prudence of such a course of action.
The growth of Microsoft’s cloud business, Azure, slowed slightly in the second quarter due to IT spending weakness amid the novel coronavirus pandemic.
The unit’s revenue, however, still jumped 47% year-over-year, and research firm Canalys recently reported that its share of the cloud services market had risen to 20% from 18% during the quarter.
And Zack’s recently reported that the company is investing in Azure by adding technologies like Kubernetes and GitHub Actions. The plan is to automate the code-checking process and launch apps to make the platform even more attractive.
A Closer Look at MSFT Stock
Earlier this month, the Pentagon reaffirmed that Microsoft had won the Defense Department’s $10 billion JEDI cloud contract. Zack’s points out that the deal may lead to additional government deals for Microsoft, boosting MSFT stock in the process.
Gregg Moskowitz, an analyst at Mizuho, believes that demand for Azure’s services remain strong, and he thinks the tech giant is poised to deliver “even greater success in cloud over the medium-term and beyond.”
Mizuho’s Moskowitz is upbeat about the company’s monetization of its Microsoft 365/Office 365 business software offerings. Indeed, with so many more people working from home, companies are going to need to buy more software subscriptions for employees who now must have Microsoft’s software on their home computers as well as on their office PCs.
It’s Not a Good Time to Buy Microsoft’s Shares
I agree with another InvestorPlace columnist, Will Ashworth, about the near-term outlook of MSFT stock and tech stocks. In his Sept. 10 column, Ashworth wrote, “the correction [of Microsoft and tech stocks] looks as if it could carry on for some time.” He added that “the market as a whole looks ready to correct 10% to 15%.”
Add in the possibility of the coronavirus pandemic worsening as the weather gets colder and continued uncertainty about the upcoming U.S. election, and I agree with Ashworth’s conclusion that investors need to exercise “patience” when it comes to MSFT stock.
Specifically, I think that investors should wait for the shares to drop to the $185-$190 range before pulling the trigger on the name.
Making me more convinced of the need for such a strategy, Microsoft’s CEO, Satya Nadella, reported on Sept. 1 that he had sold 83,572 shares of MSFT stock. Although the share sale was reportedly triggered by automatic, pre-set price and volume parameters, I’m sure Nadella could have stopped the share sale if he had wanted to.
The fact that he did not could mean Nadella thinks that tech stocks could indeed pull back over the next couple of months.
Similarly, Microsoft CFO Amy Hood sold 80,000 shares of the stock on Sept. 4, indicating that she could also be worried about a tech pullback causing a decline by Microsoft’s shares.
The Bottom Line
Due to the strength of Azure and the work-from-home-trend, Microsoft’s longer-term outlook remains positive. But amid the tech pullback and multiple risks, investors should wait for a sizable pullback by the shares before buying them.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.
