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Should You Buy The Dip In Microsoft?

L&F Capital Management profile picture
L&F Capital Management


  • MSFT stock is off 4% in the past month.
  • We maintain a ~$70 price target on MSFT stock.
  • The current risk-reward profile skews towards the downside.

We have been bullish on Microsoft (NASDAQ:MSFT) stock for some time. In May of 2015, we released our first bullish report on MSFT. At that time, we stated that Microsoft was positioned for substantial growth going forward as the company embraced and aggressively pursued its transition to a cloud-and-mobile based company.

Since then, the stock is up more than 47% while the S&P 500 is up a mere 14%. The out-performance can be credited to Microsoft successfully transitioning its legacy business to a cloud-focused one. Azure is booming. Office 365 is quickly turning into the go-to cloud-based work platform. All things cloud are growing rapidly at MSFT, and that has made investors bullish about the company's long-term growth prospects.

Throughout this entire run higher, we have not wavered in our confidence in MSFT. Time and time and time again, we have stated that MSFT was a buy.

ChartMSFT data by YCharts

But that is no longer the case. Despite the recent drop in MSFT stock, we are no longer buyers. Instead, we are neutral on MSFT stock as we feel the valuation is full.

ChartMSFT data by YCharts

This is consistent with our thinking back in January, when we put a $70 price target on MSFT stock. Our thinking was that a stock with a strong balance sheet, healthy cash flow, top-level management, and a strong and growing dividend should trade around 2x growth (on an ex-cash basis). The stock shot above our $70 price target in early June, got as high as $72, and has since fallen back to below $70.

ChartMSFT data by YCharts

We continue to believe that MSFT stock should reasonably trade at 2x growth given the company's robust growth in cloud services. Estimates still call for roughly 10% EPS growth next year

This article was written by

L&F Capital Management profile picture
L&F Capital Management, LLC, is a quantitative investment management group located in San Diego, California. Our multi-strategy investment approach comprises a mix of event-driven trades and long-term value investments, utilized together to maximize profit in both short and long term scenarios. We maintain consistency in portfolio mix through our long-term value holdings, but stress flexibility in portfolio mix from our daily event-driven trades. We believe this mix of flexibility and value generates both short and long term profits while reducing exposure to market volatility. L&F also shares various trade and investment opportunities through Seeking Alpha. For more information, visit www.lfcapitalmanagement.com.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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