Microsoft (MSFT) shares have soared 13.5% since reporting earnings on April 18. However, historical insight suggests the stock has overreached in terms of valuation. Furthermore, a serious question remains unanswered regarding whether Microsoft can stop the bleeding of lost market share to the competing mobile operating systems of Apple (AAPL), Google (GOOG) and BlackBerry (BBRY). At the same time, the global economy appears to be softening. Given these issues, I do not believe MSFT deserves the better-than-recent mean valuation that it has so quickly risen to. Thus, I suggest its shares be sold at these heights and recent gains locked in.
Microsoft shares took off after the company reported its third quarter earnings on April 18. Heading into the report, investors had been expressing concern about PC sale softness and the migration of computing to the mobile platform. The same issue hurt other PC players, including Dell (DELL), Intel (INTC) and Advanced Micro Devices (AMD) over the last year. You can see in the chart here that only Microsoft has produced a return above water over the last twelve months, and all of that gain has been accomplished over the last few weeks since the earnings news.
That earnings report served to remind investors that Microsoft remains today a mainstay in computing, and an important player in several other markets, including gaming and Internet search. The company's quarterly revenues of over $20 billion certainly silenced all the chatter in the press about the demise of the great giant. It's hard for any critic to be taken seriously making such claims against this long-lasting technology leader producing revenues that make questions about its business viability seem silly if not completely off-base.
Yet, if Apple and Google's lead in mobile computing holds, as the migration to mobile continues and perhaps accelerates, Microsoft does not seem set to keep hold of its market share. Recent data from IDC showed Microsoft with just a 1.8% share of the tablet computer market last quarter. This issue is one already well discussed by analysts and reporters and not the focus of this article, but those interested may see more about it in a separate blog post entitled, Microsoft Missed Its Moment to Defend Against Apple & Google.
Tablet Sales (Units)
Q1 2013 Share
Q1 2012 Share
The state of the economy is up for debate, and a topic already well covered elsewhere as well. Investors may review my work on the economy at Seeking Alpha to see why I believe the global economy is weakening (see bottom of linked page). My pessimism continues despite what was generally seen as a positive monthly Employment Situation Report just over a week ago, and that is because of unaccounted for unemployment, which I have written often about.
The Point is Fundamental
The point of this article is that given these perspectives and the risks that will continue to weigh on the investor mindset, both about stocks generally and this stock in particular; I do not believe Microsoft should be trading at its current height. The stock rightly found support on its reassuring earnings report, given the long history and reputation of the company, but I believe momentum took it too far.
After all, the trend of EPS estimates is a downward one, and that is precisely because of the weakening global economy and the market share threat reality. Yahoo Finance data shows analysts' consensus estimates for MSFT EPS falling across the board. June quarter estimates are down four cents from 90 days ago, while fiscal year 2013 (June) and 2014 estimates are down nine cents apiece from 3 months ago. Meanwhile, according to YCharts, Microsoft's trailing 12-month P/E ratio and price-to-sales ratio are higher than they have been in two years time. Thus, I have to argue that for the reasons outlined here, the stock has overreached to its current valuation. I would put capital to other use for now and revisit Microsoft if something changes in the fundamental data.