$ 130 looks like a cap on Microsoft Stock

$ 130 looks like a cap on Microsoft Stock

<p>Microsoft (NASDAQ: MSFT) is not immune to the fear of the technology sector. There has been some Microsoft news since MSFT reported its results in April, but Microsoft shares have still fallen 4% since the end of April.

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The catalyst seems to be the latest broad weakness in the market. And the announcement of DOJ and FTC surveys of Facebook (NASDAQ: FB) and Alphabet (NASDAQ: GOOG, NASDAQ: GOOGL) has not helped technical stocks, including MSFT stocks.

Of course, Microsoft shares should not be affected by the probes. The company already had its bruise with US antitrust regulators. But that’s kind of the point: with MSFT shares around $ 120- $ 130, it doesn’t have as much as it takes to beat down Microsoft stock. This in turn indicates that it will take a lot for MSFT shares to come back, and that it will be difficult for MSFT to go past its recent peaks anytime soon.

The trillion-dollar curse and the MSFT stock

The MSFT share performed well after its fiscal policy report on the third quarter in April. The jump after the strong Microsoft news moved the market capitalization of the MSFT share above $ 1 trillion, making it the third company to reach that level.

To date, reaching $ 1 trillion has proved to be a negative forward indicator. Apple (NASDAQ: AAPL) was the first company to break that level as early as the beginning of August. The AAPL share would continue to rise, but within two months it began a decline that obliterated a third of its market value. AAPL now has a market value of close to $ 850 billion.

Amazon.com (NASDAQ: AMZN) hit $ 1 trillion a month later. Its stay was much shorter, and it would also tumble into the middle of the market for the fourth quarter. An attempt to regain the level this year failed, and the stock is now down 10% from the levels it reached after its own profit. The GOOGL stock has come close to $ 1 trillion twice, only to pull back sharply each time.

All of this can be a coincidence. It is not really a surprise that the market’s largest shares rose when investors were optimistic and retreated when they were not. However, round market values ​​should not mean anything in connection with detailed basic analysis.

Still, it is at least possible that there is a psychological effect associated with the $ 1 trillion level. It’s a value that sounds huge (and is huge), and it’s a figure that suggests that pretty much everything should go right for a company. And so when a stock reaches $ 1 trillion market level, any signs of weakness may intensify and investors may be more willing to take profits.

Microsoft news since $ 130

Whatever the reason, even before MSFT’s recent weakness, investors seemed reluctant to pay more than $ 130 for MSFT shares, a level that is almost exactly in line with the $ 1 trillion market value. But there are also basic reasons why the roof seemed to stay in place.

It’s true that there’s been some Microsoft news since its inception, but that’s kind of the problem. Microsoft’s shares were not cheap at $ 130, as they traded at close to 25 times analysts’ average EPS estimate for 2020 after backing up their net cash. Solid income is helpful. But in order for MSFT shares to accumulate, Microsoft must report a blowout quarter, which drives optimism for a long time and proposes a fundamental change in the company’s growth trajectory.

MSFT’s Q3, as solid as it was, was not quite as good. This is still a company whose underlying earnings (before share repurchases) grow slightly less than 10% annually. Even in a bull market and even for a technology giant, it is difficult to justify much more than a P / E multiple in the mid-20s with that type of growth.

To be fair, Microsoft has launched some new initiatives. Its partnership with BMW (OTCMKTS: BMWYY) and insurer Willis Tower Watson (NYSE: WLTW) highlights the growing role of Microsoft’s new technology. InvestorPlace columnist Luce Emerson has highlighted the company’s new range of games.

None of these efforts will really touch the needle, but investors are paying mid-20s MSFT shares for a maximum of 10% growth. As a result, MSFT’s profit multiples and Microsoft shares will probably not rise much.

Between the trillion percent and the high valuation, it seems optimistic to expect more than $ 130 from MSFT.

At the time of writing, Vince Martin has no positions in any of the securities mentioned.