Microsoft (MSFT) has stood out within the pantheon of the greatest stock market winners in U.S. history. Not long after its IPO in March 1986, MSFT stock 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.
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And in 2024, MSFT stock has justified being part of the Magnificent Seven contingent of megacap stocks that have sharply outperformed one of the most popular benchmarks in investing, the S&P 500.
Yet the tech sector has taken it on the chin.
Last Friday, amid a global data networking and computer system fiasco rendered by an Microsoft Windows-related software update failure at CrowdStrike (CRWD), Microsoft stock suffered its fourth straight decline. The stock tested support at the 50-day moving average, then rebounded on Monday and Tuesday of this week. Yet overall, the action in Microsoft stock has gotten more bearish.
On Wednesday, the stock suffered more damage. Microsoft fell more than 3% in active turnover and hit a six-week low. Shares then lopped off another 2.4% on Thursday as volume accelerated to 29.4 million shares, the highest amount for a down day since April 25.
What’s more, Microsoft’s relative strength line has certainly weakened over the past three weeks. Put another way, it’s started to sharply underperform, not outperform, the S&P 500.
So, is MSFT 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 to make for individual investors to deploy their capital in Microsoft stock, an outstanding long-term tech leader.
Up until its latest pullback, MSFT stock rallied as much as 24.5% since Jan. 1. Earlier this month, this column noted that while shares were definitely cooling off, it had remained nicely above its rising 21-day exponential moving average. But no more.
The Monthly Chart
Over a longer time frame, the S&P 500 has delivered a solid gain of 16.8% on top of a 24% rebound in 2023. Nonetheless, Microsoft, serving as a principal investment choice in the themes of artificial intelligence, enterprise software, digital hardware and cloud computing, has clearly excelled.
According to the MSFT stock chart in MarketSurge, the firm is slated to post results on July 30 after the close.
To find greatness among growth stocks, look for true strength in three dimensions: stock price strength, fundamentals, and the trends of buying among institutional-class investors. As for MSFT stock, roughly two weeks ago, an 89 Relative Strength Rating, according to IBD Stock Checkup, means Microsoft had outperformed 89% of all companies in the IBD stock database over the past 12 months.
But now that RS Rating has faded to a lackluster 70 on a scale of 1 to 99.
Is MSFT Stock A Buy Now?
Let’s briefly examine company fundamentals.
MSFT stock has done a spectacular job of not only maintaining a high level of reliability and trust in its brand. Microsoft’s management team has succeeded in finding new markets and industries in which to grow at a rapid clip. Cloud computing, productivity-boosting enterprise software, computing devices and artificial intelligence are just some of the areas that have felt the Microsoft impact.
And the financials back up the story.
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Big Earnings Boost Microsoft Stock
In the fiscal year ended June 2018, Microsoft scored a profit of $3.88 a share. Five years later, its fiscal 2023 profit mushroomed to $9.81 a share, up 153% over that time frame.
How about in recent quarters? 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 of nearly $237 billion.
And sales growth, while moving at a slower clip than earnings, has remained steady (up 8%, 13%, 18% and 17% in the past four quarters). Meanwhile, gross margin edged back above 70% in the March-ended fiscal third quarter.
Solid, steady growth in both sales and earnings helped keep the IBD Composite Rating for MSFT stock at a strong level of 93 on a scale of 1 to 99. And, according to IBD Stock Checkup, the Earnings Per Share Rating of 97 remains superior. But amid the recent decline, Microsoft’s Composite has faded to a humdrum 84.
Strong earnings growth over the long term fuel heavy demand for shares. Why? The best companies invest their earnings in new industries, make acquisitions, and develop new products and technologies to drive further growth. And large stock buybacks prove to investors that the company is willing to “dine on its own cooking.” Share repurchases enhance shareholder value since they help prevent share dilution and boost earnings on a per-share basis.
Partly as a result of the company’s massive investment in OpenAI, which debuted the ChatGPT AI platform, Wall Street thinks new artificial intelligence-based features in Microsoft offerings could help power further profit and sales increases.
Microsoft Stock: Nadella’s Take
“This next generation of AI will reshape every software category and every business, including our own,” CEO Satya Nadella addressed investors 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.”
Recent achievements by the company to empower organizations range from deploying Azure AI to help Taiwan’s Ministry of Education to build an online platform to help students learn English online, to helping Mercedes-Benz make its in-car voice assistant more intuitive for drivers using ChatGPT via the Azure OpenAI Service.
On June 3, the company unveiled a multi-billion-dollar partnership with Japan’s Hitachi Group 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 ($18.9 bil) yen in revenue for FY 2024, hopes the Microsoft products can improve productivity for its 270,000 employees.
The Estimates
For the June-ended fiscal fourth quarter, analysts polled by FactSet see Microsoft’s earnings rising 9% to $2.93 a share on a 15% increase in revenue to $64.4 billion. The company is slated to report Q4 results on July 30.
Earnings are expected to grow at a slower rate of 6% for the September-ending fiscal first quarter, then reaccelerate to 12% and 13% in the following two quarters. Analysts see fiscal Q1 sales increasing 15% to $65.1 billion, then up 13% in the next two quarters.
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.
No surprise, then, that MSFT gets a top-drawer A grade for IBD’s SMR Rating (Sales + Margins + ROE).
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MSFT Stock And Institutional Activity
Microsoft stock currently has 7.432 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.
Mutual funds, hedge funds, insurers, pension plans, sovereign wealth funds and the like dominate the long-term movement of share prices. And MSFT stock is no exception. The number of mutual funds owning a piece of the stock has continued to grow.
In the third quarter of 2023, as many as 10,119 mutual funds held MSFT stock, based on MarketSurge data. That number grew to as high as 10,388 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 Charts at 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, one must 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. And finally, the daily chart helps pinpoint an exact buy point.
So, what does the monthly chart tell us?
During the 2022 bear market, Microsoft struggled like many other tech and growth companies. No surprise there.
But in the week ended Nov. 4, 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 the next month, Microsoft busted out of that downtrend in bullish form. Mr. Softy rallied 15.6% that month. Monthly turnover climbed vs. the prior month.
The monthly action highlighted a change in the character of Microsoft stock.
MSFT Stock: Weekly Chart Action
Going to a weekly chart, MSFT stock delivered a buy opportunity as it cleared a key resistance level at 276.76, the high in the week ended Feb. 10, 2023, in enormous weekly turnover. This strong move in heavy trading signified unusually strong demand for shares. Over the next 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 in great bases, and general interest wanes. However, when institutions start getting greedy again, the stock begins to rally off lows and set up a potential breakout.
And that’s what MSFT stock did.
In the week ended Nov. 10, shares cleared a saucer pattern with a 366.78 buy point. The rise has been gradual since then. But the stock also built another base as part of a base-on-base pattern. In the week ended May 24, Microsoft poked briefly above a new buy point of 430.82.
The gains after that new breakout attempt? Minimal. Plus, the stock reversed lower. On May 31, it briefly fell 7% below the buy point. This triggered the golden rule of investing, which is to cut losses short.
However, the character of Microsoft stock has changed dramatically in recent weeks.
Microsoft has now dived below its rising 10-week moving average. It’s also fallen deeper into a cup-like base that showed a 430.82 entry.
So, for those who bought the stock at its latest breakout on May 21, or during its second breakout attempt pas the same buy point three weeks later, a 7% drop below 430.82 would trigger the golden rule of investing: Keep losses small and under control.
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Daily Chart Action Today
A daily chart shows MSFT stock also found serious buyers during a test of support at the 50-day moving average at the end of May. And just days later, the stock retook the prior entry of 430.82. This gave a second chance to deploy capital.
The best time to buy a breakout stock is when it is still trading within 5% of the proper buy point. In the case of MSFT stock, the 5% buy zone goes from 430.82 up to 452.36.
Thus, in early July Microsoft stock had gotten extended past this buy zone.
Why buy in such a disciplined manner? Any stock can be prone to a normal pullback. Buy too high in the advance, and you could tagged with a quick loss of 7%-8% or more, forcing you to cut losses based on IBD’s comprehensive trading methodology.
From July 16 to 19, Mr. Softy pulled back into the 5% buy zone. While this offered a new chance to buy, stock market conditions have changed fast — especially for tech leaders. Just witness the big sell-offs this past week. Microsoft has plunged amid a harsh sell-off by fellow megacap tech Alphabet (GOOGL) after the cloud computing services rival posted second-quarter results late Tuesday.
Therefore, Microsoft stock is not a buy right now. And it is a sell for traders who bought shares in recent weeks and no longer hold a profit in the megacap tech.
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