As a financial trader, even if you’re right, you still have to be nimble. It’s understandable if you’re optimistic about Microsoft in light of the company’s powerful foray into artificial intelligence (MSFT) stock may be tricky after its incredible year-to-date rally. Consequently, today I’ll provide a possible dip-buying price so nobody can accuse you of chasing.) technology. Yet, timing your entry point with Microsoft (NASDAQ:
After all, valuations still matter and chasing vertical price moves can be bad for your financial health. With that in mind, let’s conduct a checkup on Microsoft stock to determine whether it’s in the buy zone now.
Is It Too Late to Buy MSFT Stock?
Believe it or not, Microsoft stock has rallied from around $240 at the beginning of 2023 to $335 as of this writing. That represents a gain of nearly 40%, and we’re not even including dividend payments here.
Therefore, I totally get it if you’re worried about being late to the party. Share-price rallies of this magnitude can distort a company’s valuation. In the case of Microsoft, its GAAP trailing-12-month (price-to-earnings (P/E) ratio of 35.04x is significantly higher than the sector median P/E ratio of 25.19x. Furthermore, Microsoft’s TTM price-to-book (P/B) and price-to-sales (P/S) ratios are much higher than their respective sector medians.)
In this context, I can see why Truist analyst Keith Lerner would warn that MSFT stock and other mega-cap tech stocks have “some potential for a mean reversion.” Lerner also is still long-term bullish, though, as he’s “still favoring Big Tech.”
I tend to concur with Lerner’s assessment. Microsoft, and mega-cap tech names in general, can still gain value even if they appear overvalued. Anyone who invested in 1999 should understand what I’m saying. Betting against a technology giant like Microsoft is a fool’s wager that I don’t recommend for anyone.
Machine Learning Will Drive Microsoft’s Long-Term Growth
As long as machine learning provides value to the end users of computers, phones, cars and other products, Microsoft can still grow as a company and provide value to its stakeholders. Whether you like OpenAI’s ChatGPT chatbot or not, there’s no denying that Microsoft made a smart move when it invested in OpenAI’s generative AI technology.
Along that line of thought, Evercore ISI analyst Kirk Materne predicts (per Barron’s) that “adding AI across the Microsoft … portfolio could provide $100 billion in incremental revenue by 2027.” With that huge potential sales boost in mind, Materne issued an “outperform” rating on Microsoft stock and lifted his price target on the shares from $337 to $400.
Value-focused investors might object, but Materne is way ahead of them. He fully agrees that the hype surrounding machine learning “is ahead of the reality today.” Nevertheless, Materne expects that “the impact of AI will ultimately cut across every industry and geography.”
That’s undoubtedly true, and it’s good news for long-term MSFT shareholders. Microsoft, Materne explains, is “in a unique position to monetize the platform shift to AI over the next few years.” I agree, as Microsoft is already embedding machine-learning technology into its Bing search engine and Azure cloud computing platform.
Just Be Patient With Microsoft Stock
I foresee Microsoft creating tremendous value over the long run due to its early and aggressive AI integration. Thus, even if Microsoft looks pricey now, it can still reward patient investors with substantial gains over time.
So, it’s fine to invest in Microsoft now, but I’d like to propose a more nimble approach. Just let MSFT stock pull back to $310 and then hit the “buy” button.
Or, set a limit-buy order for $310 and let your broker do the legwork. It’s a buy-the-dip strategy that has worked with Microsoft stock countless times in the past, and will almost certainly work again this time.
On the date of publication, David Moadel 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.