Each week, I’ll give an overview of a stock and Licia Leslie will follow that up with a chart analysis the next day. Bill Griffo will chime in with macro analysis and Andrew Giovinazzi will then finish out the week with a volatility breakdown.
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Hey Traders,
You’ve heard about the Magnificent 7 – seven companies worth nearly or more than a trillion dollars that have carried the market over the course of 2023.
The move in these names has been so strong that even the Nasdaq is worried about how dominant they are becoming.
Thus they are set to set off a rebalance in the Nasdaq 100 (the QQQ) that has only happened two other times (and not at this scale) to fix it.
On Friday after the close, a bunch of these names are going to get sold hard. They will likely open lower on Monday…
That leads to the question … should a trader or investor scoop up these stocks?
I’m going to take a look today at a stock that blew the doors off on Tuesday … a stock that is the second most valuable in the world, and seems to be riding the A.I. wave.
That’s right – it’s Microsoft Corp (Ticker: MSFT).
The Good
There’s a reason the stock shot up when Steve Balmer retired – there was a leadership problem. CEO Satya Nadella has chosen not to milk MSFT assets, but to leverage them.
MSFT has the Windows and Office suite that still brings them in tons of dollars, but the big growth is in cloud.
Amazon’s (Ticker: AMZN) cloud business is clearly the dominant force, but they are so good at infuriating their cloud customers by entering new businesses. Everytime AMZN enters a new business (like pet food, for example), they create customers that were on the AWS that are either going to Alphabet Inc. (Ticker: GOOGL), IBM, or most likely AZURE.
AZURE has been a huge point of growth for MSFT, and it’s going to continue to be so.
But the reason for the huge run up is, of course, AI. Compared to GOOGL, Microsoft is ahead in the race for AI search, AI functionality in Jobs … AI in general.
That is why the company, which is worth 2.57 TRILLION dollars, has seen such a run.
But that run must be followed up with performance. And what a performance they will have to deliver.
The Bad
All the metrics I like to look at for a company are elevated.
The PE is 37.5! 37.5 and the company is worth 2.57 trillion. Even at 2.57 billion I would be wide eyed.
The amount of money this company is going to have to produce to make that number realistic is astonishing.
The revenue, relative to the value, is also low. In the last 12 months, MSFT produced 207.5 billion dollars in revenue. Yes, it’s a lot … if MSFT was worth 1 trillion dollars. But at 2.57, it’s pretty low.
The EPS at 9.23 a share is fine – if MSFT was 150 dollars! But it’s not.
So the question you have to ask yourself is this … is AI going to triple MSFT revenue?
If the answer is yes, the stock is a buy. If it’s no, the stock is way overvalued.
The Verdict
This is a stock in a rift … a huge rift. It’s going to come back down to some sort of earth. The valuation may drop to a PE of 30, but that’s going to happen.
The rebalance coming on Friday is going to affect this stock and major indexes as well.
When the dust settles … then I will make a buying decision.
Questions about that? Leave a comment below!
Your Only Option,
Mark Sebastian