Sunday, December 4, 2022

Microsoft: Is It Time to Back up the Truck?


  • Microsoft has suffered this year, just like other tech stocks.
  • However, signs abound that the worst might be over.
  • Investors have a lot to be excited about in the longer term.

The index is up 15% from last month’s lows. This means that investors have a lot to be happy about going into Thanksgiving week, especially given how bleak things have looked at various times in recent months. Some signs of inflation slowing have started to appear (we’re not seeing quite the same risk-off sentiment as we did in October), and thoughts have turned toward which long-term buys look best.

Microsoft Corporation (NASDAQ:) stays on the list. After bouncing off long-term support earlier this month, Microsoft shares have popped just as much as the broader S&P 500, so investors can breathe a little easier. The worst-case scenario looks less likely to happen for those in the bull camp, but it’s still generally priced into Microsoft shares.

A few weeks ago, Microsoft topped analyst expectations on revenue and in its fiscal Q1 report. Even with that beat and an optimistic outlook from leadership, shares stayed weak and just started to rally in the week afterward.

Long-Term Potential

This kind of price action lends credence to the argument that there’s a bullish re-pricing of the stock currently in progress. CFO Amy Hood has said that she expects the company’s full-year revenue to continue showing “double-digit” growth year-over-year (YOY), even though near-term headwinds remain.

Mostly, these have taken the form of a steady drop in personal computer sales and unfavorable FX conditions. Still, even then, “healthy growth” from the company’s Microsoft Cloud service offerings will likely offset it. The former includes more temporary pain points, while the latter is seen as longer-term strength. As is evident from the recent rally in Microsoft shares and the broader equity market, macroeconomic drivers remain in play.

The red-hot prints and the Fed’s efforts to cool them have damaged stocks in general and tech names in particular. On this day last year, Microsoft shares tagged an all-time high at just under $350. They’re still down 30%, and for those buying into the recovery story, that’s a natural target to aim for.

Recent comments from the sell-side heavyweights lend weight to the long opportunity. Phil Winslow and his team at Credit Suisse have called for an “outperform” rating in recent weeks and positioned the negative impact of the currently elevated optimization cycle as temporary. Barclays (LON:) analyst Raimo Lenschow also reiterated an “outperform” rating, despite what he called “short-term challenges.”

Getting Involved

Against this backdrop, we’re seeing investors starting to get involved with Microsoft shares, building momentum. The stock’s MACD has had a bullish crossover and is in positive territory, with the underlying RSI also trending higher. In addition, Microsoft’s planned acquisition of Activision Blizzard Inc (NASDAQ:) advances all the time.

The company’s portfolio will look more robust than ever with the video game maker and cement its position in one of the hottest markets. For context, the video game industry should hit revenues of over $200 billion by 2025. Activision’s ever-popular “Call of Duty” series will be a welcome revenue stream to Microsoft’s balance sheet.

Investors should be mindful that we’re still in a tightening cycle in the near term — the Fed could give us another nasty surprise. If we can get a few more CPI readings that point to cooling inflation, the market’s mindset will quickly turn from being on the defensive toward the offensive. In that context, it’s unlikely that tech behemoths like Microsoft won’t trade at 30% discounts from all-time highs for very long.

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