Microsoft’s Breakout May Send Shares Surging Higher

Michael Kramer and the clients of Mott Capital own MSFT.

Microsoft Corp.’s (MSFT) stock has surged higher by over 5% since reporting quarterly results last week and news late Friday it had a big win over Amazon for the pentagon JEDI cloud contract. Now the stock is breaking out in a big way, and could be heading even higher based on the technical charts.

The company delivered robust fiscal first quarter results which beat analysts’ earnings estimates by nearly 11% at $1.38 per share. Meanwhile, revenue came in more than 2.5% better than forecasts at $33.06 billion versus estimates of $33.24 billion. Once again the big growth for Microsoft came from its intelligent cloud unit which saw revenue soar by over 27%, while LinkedIn saw revenue grow by 25%.

Technical Strength

The chart shows the stock has risen above a strong level of technical resistance around a price of $142. The stock has been stuck in a trading range below this level since July 26, around the time of the company’s fiscal fourth quarter results. Using previous trends in the chart the stock could rise to around $153 on this breakout, an increase of about 6% from its current price of around $144.39 on October 28.

What is also important is that the chart shows that the relative strength index (RSI) is breaking out. The RSI had been steadily trending lower since peaking at overbought levels above 70 in April. But now the RSI is once again moving higher, rising above that declining trend, a sign that bullish momentum is now moving into the stock.

Raising Estimates

The strong technical outlook for the stock is a result of the prospects for future earnings growth. Since the company reported fiscal first quarter results, analysts have boosted their earnings outlook for the company through fiscal 2022. Earnings estimates have risen by about 2% for both 2020 and 2021 to $5.39 per share and $6.05, respectively. Meanwhile earnings estimates for 2022 have increased by almost 5% to $6.99.

It means that earnings growth will continue to be strong for the foreseeable future. Based on those consensus analysts estimates, Microsoft is forecast to have a compounded annual earnings growth rate of about 13.7% through the fiscal year 2022.

Undervalued Versus Peers

It leaves the stock trading at around 23.8 times one-year forward earnings estimates, which is fairly cheap when compared to some of its software and cloud-based peers. For example, Adobe Inc. (ADBE) trades for roughly 27.8 times one-year forward earnings estimates, and Intuit Inc. (INTU) trades for around 30.1. Additionally, Microsoft trades with a much lower valuation than Amazon.com Inc. (AMZN), which is widely known for its cloud computing unit, at 62.9. Based on valuation alone, Microsoft’s stock may have further to rise to reach parity with peers Intuit and Adobe, let alone Amazon.

It seems that Microsoft is starting its fiscal 2020 on a strong footing, and that may mean the stock still has further to climb should that strong growth continue.

Michael Kramer is a financial market strategist and the portfolio manager of the Mott Capital Thematic Growth Portfolio.

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