Nothing says slow and steady like Microsoft Corporation (NASDAQ:MSFT) — at least when it comes to share prices. MSFT stock had been trading in a range of $60 to $65 for nearly four months, but a push higher Friday has sent shares to a 7% gain year-to-date and fresh all-time highs.
![Microsoft Corporation CEO Satya Nadella](https://investorplace.com/wp-content/plugins/lazy-load/images/1x1.trans.gif)
Is something about to give?
Since former CEO Steve Ballmer stepped down and Satya Nadella stepped in, Microsoft has become a bigger growth play than some investors may realize. Its emphasis on the cloud still seems to be underrated, with its Azure revenues climbing 93% last quarter. Its commercial businesses are also doing well.
Microsoft’s Office consumer products and cloud revenues remain strong, too. And while Microsoft does have good things going for it, some investors wonder if it’s enough to really sustain MSFT stock at these levels.
When there’s so much focus on the breakneck growth of companies like Netflix, Inc. (NASDQ:NFLX) and Amazon.com, Inc. (NASDAQ:AMZN), is it Microsoft we should really be paying attention to?
Of Course! People Love MSFT Stock
Microsoft is one of the ultimate buy-and-hold stocks. It’s funny how many investors continue to think of MSFT as an old-school tech dinosaur. Despite its robustly growing cloud business and acquisition of LinkedIn, many still miss the positives.
In the past 10 quarters, Microsoft has missed just one earnings estimate, and it hasn’t whiffed on revenues at all. Looking forward, analysts expect ~5% and 7.8% sales growth in 2017 and 2018, respectively. EPS growth expectations of 6.5% in 2017 are just okay, but 10.1% growth in 2018 is solid.
MSFT’s dividend yield of 2.4% is also attractive, given that 10-year Treasuries currently pay about 2.2%. The yield has been higher in the past, but the stock’s appreciation has caused it to shrink. Investors once griped that they’d trade some yield in exchange for more growth, and it seems they might be getting their wish.
The one issue for MSFT stock is valuation — and it’s an odd one, as bears and bulls alike can make a solid case.
Bulls will argue that a forward price-to-earnings ratio of 20 isn’t too bad for Microsoft. The company has steady growth and should do even better over the next few years, and it has one of the sturdiest balance sheets in the tech sector.
Bears will argue that earnings growth of 6.5% is simply not enough to justify such a lofty valuation, nor is the expectation for 10% earnings growth in 2018. Those numbers need to be significantly higher to rationalize this type of valuation.
How to Deal With MSFT Stock at These Levels
The bulls have another thing going for them when it comes to valuation: long-term investors.
Microsoft didn’t amass a $500 billion-plus market cap by mistake. MSFT stock has been a holding in many investors’ portfolios for years. Many of these long-time holders simply set the dividend to DRIP and passively standby as the stock does all the work.
That kind of passive investing makes it hard for bears. In a way, it’s like retail investors’ version of a massive share buyback (which Microsoft also offers).
MSFT stock has an excellent trend going for it at the moment. The 50-, 100- and 200-day moving averages are all drifting higher, and Microsoft currently sits above all of them. The 50-day is Microsoft’s most immediate level of support, and shares haven’t broken below that since November. (One day the stock will, but for now the line is providing robust support.)
And while the RSI is elevated at the moment, it’s hardly in overbought readings, and it still has plenty of support near 50.
The caveat here is earnings. Microsoft will report on Thursday, April 27, after the bell. A beat seems likely — the question is whether investors have more than priced in any good news that the company could report.
A big upside surprise, though, should send MSFT stock even further into new-high territory. A miss, however, could have downside to the 50- or 100-day moving averages — about 2% to 4% from here.
Bret Kenwell is the manager and author of Future Blue Chips. He can be contacted on Twitter via @BretKenwell. As of this writing, Bret Kenwell held no positions in any security mentioned.