Welcome to the (new) Pit Report!
Each week, I’ll give an overview of a stock and Licia Leslie will follow that up with a chart analysis the next day. Andrew Giovinazzi will then finish out the week with a volatility breakdown.
Have a stock YOU want us to review? Email my team here.
Now, wIth earnings season in full gear, this week we are going to take a dive into the second largest company in the world …
That’s right we are digging into Microsoft (Ticker: MSFT).
The company known for Windows and Office is one of the last two standing of the mega-caps (along with Apple (Ticker: AAPL).
But where is the stock heading?
Is now the time to jump in … or is an investable bottom further down the road?
Here is the way I see it …
The Positives for MSFT
Microsoft has two businesses that are the future of the company.
One makes money now … and one that will make it money in the future.
The business that is the diver of growth for Microsoft today is Azure, its cloud arm.
Every time Amazon angers an existing customer by jumping into its business, a new client for Azure is born.
For example, Walmart WILL NOT use Amazon web services. And for the most part does not allow its suppliers to do so, either – especially if they are smaller.
This plays into Microsoft’s hand as Azure can scoop up a new client.
The other piece that is fascinating is their investment into Chat GPT, and AI chatbot technology.
We are just starting to witness what this tech can do. Microsoft got ahead of the curve on this one and has a leg up on Google and Amazon here.
MSFT is currently $80 off of the one-year high, call it down about 25% from its top.
That said, it has a PE of $25.78. This is the PE of a company that is poised to see rapid growth.
That would come from its AI division and Azure…
But will it?
Downside for MSFT
While there are some really nice growth areas for Microsoft, its core businesses could be in for a serious downturn.
Remember Office and Teams are essentially software as a service (SaaS) products.
Take a look at a chart of Salesforce (Ticker: CRM):
The stock is more than 50% off its all time high and falling.
It is seeing sinking demand and could face further downside.
Microsoft is running up against the exact same headwinds … and I am not sure it’s priced in yet.
I think Office and Teams could have a really, REALLY bad 2023.
This will put a serious dent in earnings…
If we use similar logic from the fall in CRM and decide to be conservative – let’s say MSFT is only going to take 60% of the heat of CRM …
That would put soft down about 31% from peak to trough … about where we are.
If I want to be more aggressive, we could say 70%. That would be a 42% drop and put MSFT closer to $200. I think that is a safe level to dive in.
So, near $200 per share I think I would be a buyer – near term. I think it falls to break the 50 DMA and goes lower.
So my take on MSFT is we are getting close … but we are not there yet.
If only there was an option strategy that would let me buy the stock at that level.
Oh wait …
Your Only Option,
Mark Sebastian