Enterprise software juggernaut Microsoft (MSFT), like most tech stocks, has started September on the wrong foot. While a 1.9% drop in Microsoft stock on Sept. 3 proved lighter than a 3.3% bludgeoning of the Nasdaq composite, its 3.7% slide last week offered little comfort. The Nasdaq wound up falling nearly 5.9%.
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Certainly, the rebound that began in early August has cooled off a lot. At this point, does the pullback in the megacap tech and one of the Magnificent Seven megacap stocks look normal?
Secondly, has a new entry point arrived?
Despite the relatively shallow correction in MSFT's price from July to early August, the lack of power in the current rally attempt points to elevated risk in going long. Plus, shares aren't ready for a new breakout and a big run to all-time highs, which would make every investor owning Microsoft stock happy.
Microsoft Stock Today
On Aug. 15, two days after the stock market marked a critical juncture on Aug. 13, shares marked a sixth straight gain. Tuesday's 2.1% rebound is encouraging. However, MSFT has traced mostly sideways action lately. While the stock is still trading below a downward-slanting 50-day moving average, it has still bounced neatly from a near-term low of 385.58.
Microsoft stock, a member of IBD's Long-Term Leaders, lost 6.4% for the month of July, its worst decline in three months. During most of that month, volume on down sessions was sharply above the stock's average over a 50-day moving time frame. That highlighted heavy professional selling. It finished August down a mild 0.3%. Bullishly, Microsoft also closed near the top of its monthly price range.
The gain since Jan. 1 has shrunk to 10%. Volatility remains elevated. MSFT sank 7.5% in April, marking its worst monthly decline since September 2022.
However, the stock continues to stand out within the pantheon of the greatest stock market winners in U.S. history. Not long after its IPO in March 1986, MSFT became a big winner on an initial breakout from a four-month base. Microsoft stock has shown leadership — and enriched investors by rising to new highs — in multiple bull markets since then. Even amid the current slide, the company still harbors a total stock market value of $3 trillion.
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Is MSFT Stock A Buy Now?
Currently trading near 414, the Redmond, Wash., firm trades less than 12% off its peak of 468.35. So, is Microsoft stock, affectionately nicknamed by some investors as Mr. Softy, a buy now? Or is it a sell?
This story examines the fundamental, technical and institutional sponsorship metrics of the Redmond, Wash., firm and whether it makes sense right now for individual investors to deploy their capital.
Microsoft stock had rallied as much as 24.5% since Jan. 1. It began the year at 376.04. But this summer, Microsoft's relative strength line has continued to fall, meaning it's underperformed the S&P 500.
June Fiscal Q4 Results
On July 30, the company reported earnings in the June-ended fiscal fourth quarter of $2.95 a share, up 10% vs. a year ago and a penny above the FactSet consensus forecast. Revenue grew 15% to $64.7 billion, $300 million above views.
The company's Azure and related cloud services sales jumped a healthy 29% to $28.5 billion. However, that missed the Visible Alpha consensus estimate of $28.7 billion. Devices revenue dropped 11%. LinkedIn revenue grew 10% while Xbox content and services rose 61%. Productivity and business process revenue came in at $20.3 billion. Microsoft chalked up $13.22 billion in product revenue and $15.9 billion in the area of personal computing.
Please read this IBD tech story for more color on analysts' reactions.
Following a global data fiasco rendered by a Windows-related software update failure at CrowdStrike (CRWD), Microsoft stock slumped to the 200-day line, a key long-term technical level of support and resistance.Nonetheless, Microsoft serves as a principal investment choice in the themes of artificial intelligence, enterprise software, digital hardware and cloud computing. It has gained 860% since the end of July 2014. The S&P 500 has rallied 189%.
To find greatness among growth stocks, look for true stock price strength, excellent fundamentals, and clues of strong buying among institutional-class investors. The company has done a spectacular job of not only maintaining a high level of reliability and trust in its brand. Management has found new markets and industries in which to grow at a rapid clip. Company financials back up the story.
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Big Earnings Boost Microsoft Stock
In fiscal 2018, Microsoft scored a profit of $3.88 a share. Six years later, profit totaled $11.80 a share, up 204% over that time frame.Over the past four quarters, Microsoft's earnings per share on average rose 23.5% vs. year-ago levels. Simply incredible for a company with trailing 12-month sales topping $245 billion.
Sales have moved at a slower clip than earnings. But growth has remained steady, up 8%, 13%, 18% and 17% in the past four quarters. Gross margin edged back above 70% in the March-ended fiscal third quarter.
No wonder IBD Stock Checkup gives an Earnings Per Share Rating of 93. But Microsoft's IBD Composite Rating is still disappointing at 70. The Relative Strength Rating edged up in recent day to 53, but that is still meh. Back in August, it stood at 83.
A 53 RS Rating means Microsoft stock has outperformed just 553% of all companies over the past 12 months.
Remember this number: 87. IBD research discovered it to be the average Relative Strength Rating among the biggest stock market winners in recent decades when they began their gigantic price runs.
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MSFT Stock: Nadella's Take
The company has invested billions of dollars in OpenAI for its ChatGPT AI platform."This next generation of AI will reshape every software category and every business, including our own," CEO Satya Nadella stated in the company's 2023 annual report. "Forty-eight years after its founding, Microsoft remains a consequential company because time and time again — from PC/Server, to Web/Internet, to Cloud/Mobile — we have adapted to technological paradigm shifts."
However, Wall Street seeks fresh evidence that customers are increasing their adoption of AI-infused products and services.
Microsoft has deployed Azure AI to help Taiwan's Ministry of Education build an online platform to help students learn English online. It is helping Mercedes-Benz make its in-car voice assistant more intuitive for drivers using ChatGPT via the Azure OpenAI Service. And on June 3, the company unveiled a multibillion-dollar partnership with Japan's Hitachi to help accelerate the latter's Lumada unit's growth. Microsoft will embed the Microsoft cloud, Azure Open AI service, Copilot for Microsoft 365 and GitHub Copilot into Lumada's software stack. Hitachi, which aims at 2.65 trillion yen ($18.9 bil) in revenue for FY 2024, hopes the Microsoft products can improve productivity for its 270,000 employees.
Separately, the Wall Street Journal recently reported Microsoft's newest personal computers that feature its artificial intelligence features won't run the most popular video games due to a change in graphic processors that use technology from Qualcomm (QCOM) and Arm (ARM).
New Fiscal Year: The Q1 Estimates
For the September-ending first quarter, the consensus EPS estimate stands at $3.11 vs. $2.99 a year earlier, up a modest 4%. Analysts also see fiscal Q1 sales increasing 14% to $64.5 billion (trimmed recently from $65.2 billion), then up 12% to 14% over the next three quarters.
According to Yahoo Finance, among 31 analysts surveyed, the earnings forecasts range from $2.96 a share to $3.19. The upper end got shaved from $3.32. The revenue estimates range from $64.2 billion to $65.2 billion.
In fiscal 2023, the company posted an impressive 39% return on equity (ROE), a measure of profit-generating efficiency. Its long-term debt to shareholders equity was reasonably low at 20%. Big stock market winners, such as Microsoft stock, tend to post high ROEs in the early stages of their price runs.MSFT gets a top-drawer A grade for IBD's SMR Rating (Sales + Margins + ROE).
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Microsoft Stock And Institutional Activity
Microsoft stock has 7.43 billion shares outstanding. One of the few companies in the trillion-dollar club, its total market value hit $3.42 trillion.
According to MarketSurge, 41% of those shares are in the hands of funds. Management owns 1% of shares outstanding, or roughly 74 million shares.
Mutual funds, hedge funds, insurers, pension plans, sovereign wealth funds and the like dominate the long-term movement of share prices. MSFT stock is no exception.In the third quarter of 2023, as many as 10,119 mutual funds held MSFT stock, based on MarketSurge data. That number has since grown to as high as 10,443 funds as the end of the June quarter.
Strong cash flows allow Microsoft and similar leaders to pay cash dividends to hordes of shareholders. On June 12, the company's board approved a quarterly payout of 75 cents per share, payable Sept. 12 to holders of record on Aug. 15.
On an annualized basis, Microsoft stock's dividend yield is mild at nearly 0.7% — far below a 1.3% yield for the S&P 500, according to General Market Indicators Chartsat Investors.com. To find this page, go to "Market Trend" on the main navigation bar of the Investors.com homepage.
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Technical Action
To determine the right time to buy MSFT stock, always consult a stock chart. The monthly chart offers an excellent view of a stock's long-term trend. The weekly chart helps a savvy investor identify time-tested chart patterns that have repeatedly emerged among big stock market winners. Finally, the daily chart helps pinpoint an exact buy point.
A monthly chart showed during the 2022 bear market, Microsoft struggled like other growth companies. But in early November 2022, the stock bottomed out at 213.43 and began to grind higher. Three months later in February 2023, Microsoft stock attempted to break a 14-month downtrend. While it gained some ground, the attempt failed. But in March, Microsoft busted out of that downtrend in bullish form. Mr. Softy rallied 15.6% that month. Turnover climbed.
The monthly action highlighted a bullish character change in Microsoft stock.
MSFT Stock: Weekly Chart Action
On a weekly chart, MSFT stock delivered a buy opportunity when it cleared 276.76, the high in the week ended Feb. 10, 2023, in enormous weekly turnover of 237 million shares. This strong move signaled unusually strong demand. Over 18 weeks, Microsoft rallied more than 32%, then dipped back into base-building phase.
A base allows a great stock to take a break as investors lock in gains. The price action becomes dull; general interest wanes. However, when institutions start getting greedy again, the stock begins to rally off lows and set up a potential breakout.
The stock broke out again. In the week ended Nov. 10, 2023, shares cleared a shallow saucer pattern with a 366.78 buy point. Shares built another base as part of a base-on-base pattern.
Not all breakouts succeed.
In the week ended May 24 this year, Microsoft stock poked briefly above a 430.82 entry. Gains were minimal. Then on May 31, it briefly fell 7% below the buy point. This triggered the golden rule of investing: cut losses short. Nearly two months later in July, Microsoft dove below its 10-week moving average. It undercut the low of a flat base with a 430.82 entry.
IBD's Stock Market Outlook Today
Microsoft Stock: Daily Chart Action
On Tuesday Sept. 3, IBD adjusted its suggested investment exposure level. This has implications for new positions.
While the stock market has made progress after a , further declines would pose as a higher risk in new buys.
For a couple weeks, Microsoft has offered an aggressive entry near its 200-day moving average for investors who already hold a big gain and would like to add to their positions. The 200-day moving average remains bullish and has risen above 411.
On Tuesday, Microsoft stock rallied 2% and finished nicely above this long-term technical level. Yet, unless the stock continues a spirited rebound, it is not yet a buy.
One final suggestion: Be wary of buying too far above the 200-day line. IBD suggests this rule: Buy within 5% of the buy point or moving average. Also, if the rebound withers and MSFT falls hard, cutting losses on newly bought shares remains the golden rule of investing.
Please follow Chung on X/Twitter: @saitochung and @IBD_DChung
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