Source: PaxForex Premium Analytics Portal, Fundamental Insight
Microsoft shares gained more than 15% last month, according to S&P Global Market Intelligence. Investors reacted positively to news related to the company's anticipated acquisition of gaming industry leader Activision Blizzard. Shares also surged on the back of momentum in the technology sector, which was driven by a shift in economic expectations.
March was a relatively quiet news month for Microsoft, which had released quarterly financial reports the previous month. There were some changes concerning the company's planned acquisition of video game developer Activision Blizzard. The deal had been announced more than a year ago but was delayed as various governments scrutinized the deal under antitrust laws. There have finally been positive developments in this regard, as UK regulators have formally lifted some of their concerns that had prevented the deal from taking place. Microsoft continued to push the deal forward with a long-term agreement to stream Activision's popular Call of Duty franchise in Japan. Activision will account for less than 2 percent of Microsoft's total revenue, so it's not exactly a game-changer for the tech giant. Nevertheless, the deal will make Microsoft one of the biggest players in the fast-growing game industry, strengthening one of its lucrative business segments.
Microsoft has also gained some momentum with its expanding artificial intelligence (AI) business. The company has established itself as a major player in this area through its partial ownership of OpenAI and its partnership with an AI software developer. Investors are now passionate about potential AI business applications, and any reports on the topic are driving the stock price up. In March, Microsoft held a conference in which it announced that its Office suite would soon receive an update with AI integration.
That news is not to say that it was momentous, but it was enough to support a rise in prices. Microsoft also benefited from industry-wide growth driven by macroeconomic factors. Tech stocks rose after the Federal Reserve's press conference in March, as investors had hope that rate hikes would stop in the second half of the year. That would remove an important factor that has held down valuations of growth stocks.
Microsoft has been among the giant technology leaders for decades, but now its business is more diversified than ever. It is a leader in numerous important market segments, including artificial intelligence, games, productivity software, cloud services, Web search, and digital advertising. As a result, the company has a fairly stable cash flow that also outpaces broader economic growth. It's a rare combination and one that appeals to a wide variety of investment strategies.
Unfortunately, however, everyone knows that investors have to pay a premium to buy Microsoft stock. The stock's forward P/E ratio is now above 30, which is a bit high compared to consensus growth forecasts.
The recent valuation hike means that the stock is already priced high, which adversely affects the risk/reward ratio. Failure to meet elevated expectations could trigger a drop in the stock price.
However, long-term investors should not be afraid to buy stocks with high expectations just because they are slightly overvalued. Nevertheless, the new valuation means that buyers should be prepared for potential volatility, especially if the economy does fall into recession later this year.
As long as the price is above 275.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 289.03
- Take Profit 1: 294.00
- Take Profit 2: 304.00
Alternative scenario:
If the level of 275.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 275.00
- Take Profit 1: 267.00
- Take Profit 2: 267.00
