Microsoft, a stalwart of the technology industry, is having a tough time keeping up with the recent rebound in the biggest US megacap stocks.
Shares of the blue-chip software company are down more than 6% this year. That’s in contrast to Apple, which just posted its longest winning streak since 2003, Amazon.com, which is higher on the year, and Alphabet, down less than 2%.
Analysts say Microsoft’s business is doing fine, unlike those of big-tech laggards Netflix and Meta Platforms. The main issue holding the stock back is valuation. Investors have been buying tech stocks, enticed by discounts after the selloff earlier in the year, but Microsoft still sells for 30 times estimated earnings, making it more expensive than most peers.
“It carries a premium multiple, and that’s one of the things that has caused it to lag relative to the names it tends to be compared to,” said Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder, which has about US$8-billion in assets and owns Microsoft shares.
The Nasdaq 100 Index is priced at 26 times profit, while Apple and Alphabet also are both well under 30 times earnings.
Microsoft’s recent acquisitions — a $19.6-billion deal for Nuance Communications and a $68.7-billion bid for Activision Blizzard — also might be crimping its shares as Microsoft dips into its cash reserves, while also facing regulatory scrutiny.
And other tech firms have also fed bulls with news to call home about: Amazon and Alphabet have proposed stock splits while Apple and Nvidia had product events that propped up their shares.
Microsoft gave a strong forecast for its cloud computing business in January, and analysts are optimistic about the company’s prospects. Wall Street forecasts revenue growth of 18% for Microsoft this year and double-digit gains in the next three, according to data compiled by Bloomberg. That’s faster than Bloomberg Intelligence’s estimated growth for tech companies in the S&P 500, and for the software sector.
While investors aren’t flooding back in, analysts believe they will. Its stock has 48 buy ratings, four holds and no sell recommendations. They are projecting an 18% rally in its shares over the next 12 months.
“The outlook for Microsoft is outstanding, and overall we’re seeing very solid growth compared with what I would have told you was possible three years ago,” said Pat Burton, co-portfolio manager of the $13.9-billion MainStay Winslow Large Cap Growth Fund, which has Microsoft as its largest holding.
Other big technology stories we’re watching:
- Amazon.com got its first sell rating since 2020 as BNP Paribas Exane analyst Stefan Slowinski initiated coverage of the e-commerce giant with an underperform rating.
- China has pledged to root out crimes including tax evasion on live-streaming services, a stark warning to an industry that’s come under fire in recent years for content violations. Chinese tech stocks trimmed gains on the prospect of fresh curbs on the online video industry.
- Arm is shifting a chunk of its stake in Arm China to parent SoftBank Group and revising how it accounts for the troubled Chinese affiliate, people familiar with the matter said. The bookkeeping change may ease the British chip designer’s path to an initial public offering.
- Taiwan Semiconductor Manufacturing Co chairman Mark Liu said demand for consumer electronics including smartphones, PCs and TVs has been hurt by China’s lockdowns.
- Nintendo fell by more than 4% in Tokyo on Wednesday after announcing that it will delay the launch of the next Zelda game to 2023, spurring concern over software revenue in the next fiscal year.
- Micron Technology, the largest US maker of memory chips, gave an upbeat forecast for the current quarter, a sign that demand remains strong from rapidly expanding data centre customers. — (c) 2022 Bloomberg LP