While many names recently have been pummeled, Microsoft Corporation (NASDAQ:MSFT) has been surprisingly defensive. Does that make Microsoft stock a buy or is it only a matter of time before it gets hit too?
From its highs, Microsoft stock is off about 7.2%. That’s actually better than the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) (down 10.2%) and actually pretty solid when you consider how far the FANG stocks have fallen from their highs. Consider:
Facebook Inc (NASDAQ:FB) -19%
Amazon.com, Inc. (NASDAQ:AMZN) -12%
Netflix, Inc. (NASDAQ:NFLX) -13%
Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) -15.5%
Best House in a Bad Neighborhood
Not that I’d consider FANG a “bad neighborhood” necessarily. But when considering the group’s recent performance, Microsoft’s 7% fall doesn’t look all that bad.
For one, it not being a part of the FANG group helps, as AMZN has been picked on by President Trump and FB’s been dumped ( although surprisingly not as hard as Twitter Inc (NYSE:TWTR) and Snap Inc (NYSE:SNAP)) because of its user data issue.
Microsoft doesn’t really have any bad laundry to air.
Think about it vs. its peers. Alibaba is one cloud alternative, but its shares have been under pressure as China and the U.S. engage in an escalating trade war. Microsoft’s biggest cloud competitors in the U.S. are AMZN and GOOGL. As we noted, the former’s been hit by Trump comments, while the latter’s caught up in FANG selling.
salesforce.com, inc (NASDAQ:CRM) is another alternative, down about 10% from its highs. But it’s in the midst of digesting a recent $6.5 billion acquisition of Mulesoft Inc (NYSE:MULE). While Microsoft may have a lower growth rate than CRM, it’s also got a much more attractive valuation. In this type of market, that’s a good sticking point.
You could make a case for other big tech, like Intel Corporation (NASDAQ:INTC), Cisco Systems, Inc. (NASDAQ:CSCO) or Qualcomm, Inc (NASDAQ:QCOM). But Microsoft stock has so far outperformed these names and has better growth prospects.
Who does that leave? Apple Inc. (NASDAQ:AAPL) is one choice, as it has a low valuation, solid growth and will return plenty of capital this year. Along with Microsoft stock, Apple could be a solid option for investors. For the record, it’s down about 8% from its highs, roughly in-line with Microsoft stock.
Valuing Microsoft Stock
Analysts are looking for revenue growth of 11% in 2018 and 8.6% growth in 2019. On the earnings front, estimates call for 11% growth this year and another 7.5% growth next year.
However, I’d be willing to bet the company can beat these estimates. Over the last 10 quarters (two and a half years!) Microsoft has missed revenue estimates just once and hasn’t missed an earnings estimate. That’s pretty darn dependable.
In any regard, we’re paying just 24 times this year’s earnings estimates for a best-in-breed technology stock. Microsoft has a rock-solid balance sheet, pays out a ~2% dividend yield and is sealing its position in the cloud-computing market. Further, it’s laying the groundwork for artificial intelligence and recently announced a $5 billion investment in the Internet of Things market.
The bottom line? CEO Satya Nadella has MSFT moving in the right direction.
Trading Microsoft Stock
On the chart below, you’ll see two trend-lines, one in black and the other in purple. Should black trend-line support give way, it opens up the possibility that MSFT stock has further to fall.
Click to Enlarge
Specifically, a decline into the mid- to low-$80s is possible. Microsoft consolidated in this range through November after a strong earnings result boosted the stock higher. Should the QQQ remain under pressure though, it’s likely that current trend-line support (black) and the 100-day moving average will give way, even though MSFT is a solid name to own in this stressed out market.
If that’s the case, I’d look for a retest of the 200-day moving average. Should the QQQ get some relief, look for Microsoft stock to approach its previous highs.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell held a position in GOOGL, CRM and AAPL.