September has meant volatility with a downward bias in many tech shares like Microsoft (NASDAQ:MSFT). MSFT stock, which ended August at $225.53, is now hovering at $207. That is a decline of about 6%. Yet, despite the recent decline, the shares are up over 31% year-to-date.
As recent research led by Amit Kramer of University of Illinois highlights, “one of the most observable changes which occurred as a result of the Covid-19 pandemic has been the shift of many employees to work from home arrangements across occupations.” It follows that technology companies that have played a role in helping organizations and employees in the shift to working-from-home have seen their share prices soar.
Strong performance of MSFT stock has been based on robust fundamentals, which I expect to continue in the quarters to come. Therefore, potential shareholders may regard drops in the stock price as opportunity to invest in Microsoft for the long-term.
With earnings season approaching, here’s a look at how the shares may fare in near future.
What MSFT Stock Investors Should Watch
Redmond, Washington-based Microsoft is one of the world’s leading technology companies. In late July, the group announced Q4 results for the quarter ended June 30. Revenue was $38.0 billion, an increase of 13% year-over-year: Net income was $11.2 billion, a decrease of 15% GAAP YoY (but up 5% non-GAAP YoY), Similarly, diluted earnings per share was $1.46 and decreased 15% GAAP YoY (but up 7% non-GAAP).
Microsoft reports revenue in three segments:
- Productivity and Business Processes (revenue was $11.8 billion and increased 6%);
- Intelligent Cloud (revenue was $13.4 billion and increased 17%);
- More Personal Computing (revenue was $12.9 billion and increased 14%).
Overall, each segment makes a significant contribution to the bottom line. Management emphasized that strength in cloud drove the quarterly results. Investors were pleased to see Xbox content and services revenue increased 65%. Metrics for Xbox, Microsoft’s series of video game consoles, comes under More Personal Computing.
On another note, Microsoft is releasing its Xbox Series X console on Nov. 10. Sony (NYSE:SNE) is also launching PlayStation 5 (PS5), its long-awaited game console, on Nov. 12. Competition between the two has been fierce over the years. It is likely that consumers will put either console on their shopping list for the holiday season.
CEO Satya Nadella said, “The last five months have made it clear that tech intensity is the key to business resilience … We are the only company with an integrated, modern technology stack – powered by cloud and AI and underpinned by security and compliance – to help every organization transform and reimagine how they meet customer needs.”
In the six weeks following the release of Q4 results, MSFT stock moved from the $200 level to an all-time high of $232.86 on Sept. 2.
Should You Buy MSFT Stock Now?
The 52-week range for Microsoft shares has been $132.52-$232.86. Right now, they are hovering at $212. As a result of the recent run-up in price, its forward P/E and P/S ratios stand at 31.75 and 11.13. These are rich metrics even for a tech giant like MSFT stock.
The company is expected to report earnings next on Oct. 28; the U.S. elections are on Nov. 3. Given the potential volatility in the markets around the date, long-term investors may want to analyze those quarterly results before buying into the shares.
Current shareholders would appreciate how momentum-driven Microsoft stock is, especially around earnings dates. In other words, when it reports in less than a month, investors can expect rather wide big price swings. If the results come in better than expected, Microsoft stock can easily gap up. And the reverse would also be true if the numbers disappoint, too.
Short-term profit taking is likely to push MSFT stock toward the $200-level or even lower, which would mean a better entry point for long term-investors. In the long-run, the stock price is likely to increase much more.
Investors who are not ready to commit full capital to MSFT stock could consider buying an exchange-traded fund (ETF) that also has Microsoft as a holding. The shares are the second-largest holding in the following funds, according to ETFdb.com:
- Fidelity MSCI Information Technology Index ETF (NYSEARCA:FTEC), with a 16.4% weighting of the shares out of 321 stocks in the portfolio;
- iShares U.S. Technology ETF (NYSEARCA:IYW), 17.3% weighting out of 158 stocks;
- Technology Select Sector SPDR Fund (NYSEARCA:XLK), 20.2% of the 73-stock portfolio;
- Vanguard Information Technology Index Fund ETF Shares (NYSEARCA:VGT), 16.44% out of 327 holdings.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.