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The S&P 500 closed Thursday nearly 27% below its February high, meaning it took just a matter of weeks for a bear market to roll around. Microsoft fell as well. This month, MSFT is lower by 24%. But yesterday, it started gaining again.
The recent sell-off in Microsoft Corporation (NASDAQ: MSFT) seems like a huge buying opportunity. Since February 19, Microsoft stock has dropped 28% even though it makes no sense. Or does it?
At the time of writing, Microsoft (MSFT) stock is trading at $143.68 (+0.68%). Yesterday, it gained 1.65% while in the premarket it was over 6% up.
It is true that Microsoft has little exposure to the disruption the U.S. economy is going to face. However, it did go with changing its quarterly guidance for the More Personal Computing segment between $10.75 and $11.15 billion.
Personal Segment and Azure Platform Halted Their Rise
Because of closely monitoring the impact of the COVID-19 health emergency, the company announced:
“For the third quarter of the fiscal year 2020, we do not expect to meet our More Personal Computing segment guidance as Windows OEM and Surface are more negatively impacted than previously anticipated. All other components of our Q3 guidance remain unchanged.”
Also, it is estimated that the adoption of the Azure cloud platform will probably be halted as well. Office 365 sales are going to take a hit and could see mid-term pressure if the short-term shutdown turns into a mid-term recession.
However, all of this isn’t enough to suggest Microsoft is worth 28% less than it was four weeks ago. With cash on the balance sheet well in excess of debt, there’s no bankruptcy risk, either.
Microsoft (MSFT) Still Has One of the Best Valuations
Even though the company managed to lose more than $400 billion in market value in less than a month, it still traded at nearly 33x the consensus earnings per share estimate for fiscal 2020.
Just, for example, the second-most valuable company in the market, behind Apple Inc (NASDAQ: AAPL), was never traded at more than 30x earnings. Rarely would the multiple get over 20x.
Back in 2007, a multi-year bull market was set to stop. But even then, the market’s most valuable companies looked almost cheap on an earnings basis. Exxon Mobil Corporation (NYSE: XOM) was the world’s most valuable company and traded at 12x earnings. General Electric Company (NYSE: GE) was second, trading at 19x. Microsoft was fourth behind French oil giant Total S.A. (EPA: FP) and was valued at just 21x earnings.
When talking about the valuation per se, Microsoft shares still trade at 22x next year’s consensus EPS estimate. Again, relative even to the 2007 bull market, that’s a reasonably high multiple. Against expected approximate 11% EPS growth, it’s not that cheap.
Fall of S&P 500 Dragged the Stock Down
Also, we cannot say that Microsoft stock is trading at a multi-year low. The stock only has returned to where it traded in October. Before the stock went down, it had a historic run. The stock had a market capitalization of over $700 billion and then doubled in 14 months. So it can be easily said it performs perfectly.
Be it as it may, the S&P 500 closed Thursday nearly 27% below its February high, meaning it took just a matter of weeks for a bear market to roll around. That is exactly the reason why a broad swath of high-quality stocks now resides at levels not seen in months. Microsoft is one of them.
Wedbush analyst Daniel Ives said:
“However, looking past the fear and panic (and a potential short-lived economic dent/softness), we believe these high-priority areas of spending and business models have attractive risk/rewards looking ahead and we would be buying these tech names at current levels.”
What we often forget is sociological and psychological points in trading where investors often fall against the influence of masses. Due to COVID-19 fast spread, some traders started panicking and the market was overflowed with short-selling accounts. That is also one of the reasons Microsoft (MSFT) went down together with all, usually strong blue-chips.