Microsoft (NASDAQ:MSFT) is continuing its topsy-turvy year. Shares of MSFT stock fell by more than 3% on Wednesday on heavy trading to drop to less than $300. Shares are threatening the 50-day moving average of $298.57. But it is the $275 level that investors should be keying in on.
Microsoft stock quickly began falling as tech stocks took a breather in the first quarter. On two occasions (Mar. 8 and Mar. 14), MSFT stock fell as low as $275. But both times it managed to bounce off those lows to hit $300 again. Now MSFT appears to be in another downturn. After peaking at nearly $315 on Apr. 4, Microsoft started losing steam again and opened today just under $300.
The biggest issue this week, of course, is the hawkish tone among the U.S. Federal Reserve (Fed). Tech stocks like Microsoft started easing down in anticipation of yesterday’s release of the Fed’s minutes following the last Federal Open Market Committee (FOMC) meeting. And their fears were somewhat justified. When those minutes were released at 2:00 p.m. Wednesday, the Fed revealed that it discussed reducing its bond holdings to the tune of about $95 billion a month. Officials indicated support for rolling off a maximum of $60 billion in Treasuries and $35 billion in mortgage-backed securities. This would be phased in over three months beginning in May. That is about twice the rate as the last time the Fed reduced its bond holdings from 2017 to 2019 as it shifted its monetary policy.
Microsoft and other tech stocks are seen as vulnerable to these types of policy shifts because higher interest rates adversely affect them. Growth stocks like MSFT have their future earnings discounted in a rising interest-rate environment. So far this year, Microsoft is down almost 11% with a price-earnings ratio of 31.05 and a price/earnings-growth (PEG) ratio of 2.17.
But the company is also a reliable profit machine, with its popular Microsoft Office suite of products, search engine, cloud application, MSN web portal and Xbox gaming system. It also announced in January that it is buying Activision Blizzard (NASDAQ:ATVI) for $68.7 billion. The deal would make Microsoft the globe’s third-largest gaming company and the largest game company in the U.S.
Revenue in the fourth quarter was $51.73 billion, beating analysts’ expectations for $50.79 billion. Earnings were $2.48 per share, which also beat expectations of $2.32 per share.
I would be surprised to see MSFT drop lower than $290 even in this rising interest rate environment. There are too many headwinds to keep this massive tech company down for long. But if shares do drop to that level, MSFT stock becomes a must-buy name.
On the date of publication, Patrick Sanders did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
