Company background

Microsoft is an American multinational technology corporation, headquartered in Washington. The company develops, manufactures, supports, licenses and sells computer software, personal computers, consumer electronics, as well as other related services. In fact, Microsoft is one of the largest broad-based technology providers in the world. The company has been dominating the PC software market for a long time now and has currently got more than 80% of the market share for operating systems. Moreover, the company’s Microsoft 365 application is one of the most well-known software globally.  Microsoft is now one of the two public cloud providers delivering a wide range of infrastructure-as-a-service (Iaas) and platform-as-a-service (PaaS) solutions at scale. The company’s wide range of products include PCs, tablets, gaming consoles, phones and other intelligent devices. Microsoft’s Azure offers cloud-based solutions, providing customers with software, platforms and other content.


Financial performance and Q1 earnings results

By looking at Microsoft’s financial statements, we should say the company has kept on growing its revenues and making higher profits for over 5 years now. In fact, the revenues of the company have almost doubled between 2016-2020, while the net income has tripled during that period of time. In other words, the company has kept on growing in the sector it operates and gaining more market share, as well as keeping costs low, allowing it to boost its net profits, making higher profits for its shareholders. Actually, the company’s long-term debt has been decreasing in the past 4 years since 2017, meaning that Microsoft has not been dependent on using debt financing for its operations on a large scale, which has proven the effectiveness of its management during that period of time. As a matter of fact, the company’s debt to equity ratio is only 0.37, which is quite a conservative number especially during the coronavirus pandemic we have been living in for more than a year now.

Microsoft benefited from the adoption of Azure services that helped accelerate its global digital transformation and boosted the company’s results further. During the pandemic, the company has been also benefiting from the continuation of the remote work, online learning and tele healthcare trends. Moreover, the company has seen some solid numbers coming from its new Xbox consoles, as well as its growing use base in its different applications including Microsoft 365 suite and Dynamics.


By looking at the company’s earnings results, we shall say Microsoft has beaten analysts’ expectations in all of the past 4 quarters during the coronavirus pandemic. Moreover, the company has actually been growing its earnings in each of the past 3 quarters of 2020 (Q2, Q3 and Q4), followed by a little decrease in Q1 of 2021, where it still beat analysts’ expectations of $1.76 per share, delivering $1.95 per share and further confirming its strong financial performance and market positioning. We have been quite impressed by the company’s performance especially during the pandemic. It has been among the best performing companies in the past year and the quarterly earnings results coming out better than expected has led to a massive appreciation of the company’s share price, making high profits for investors and traders.


Technical analysis


By looking at the daily chart of MSFT, one could see the massive uptrend that has been going on the stock in the past 13 months since the 23rd of March 2020. The stock bounced from the strong support at $131 back then to reach the $263 highs in the end of April this year, meaning the stock has exactly doubled during that period of time – quite an impressive rally.

In the first few days of May we have seen a bit of a profit-taking correction on the stock, mainly based on a profit-taking interest where investors and traders have been collecting profits after the massive bullish rally in the past year.

Thus, the stock has already dropped towards the current levels at $246. Yet, the daily chart clearly shows the strong support at $245 that used to be a key resistance level that was broken in April and is now expected to bring lots of buying interest at that point and is very likely to lead to another strong bullish rally on MSFT afterwards. The lower Bollinger band together with the 50 day  moving average match with the strong support at that level, while the RSI has gone down to 40 and the Stochastics has already started crossing up from the oversold territory, giving further bullish indications. The horizontal support matches with the diagonal support level at $245 and that is actually giving us more indications for a very likely price reversal in the short term. Even if the price breaks that first key support mark it would be heading towards the next major support at $231 where more buying pressure is expected.


By considering the strong financial performance of the company and the latest earnings report that came out better than expected again, we would definitely be looking to add MSFT to our portfolio.

Chart: MSFT


As you know, we at Dow Experts always include the importance of both fundamental and technical factors in our analyses because we believe they are key metrics for the overall performance of the instruments we analyze. Furthermore, before we take an action to buy the stock we are evaluating, we analyze the performance of the biggest ETFs out there in which the company we analyze plays a major role. In other words, we use our cross-sector correlation analysis in order to find out whether there is a similarity between the price-action trade of the current stock we are evaluating and if there is a confirmation by certain ETFs that have invested in that particular stock.

Only if there is a clear confirmation between the ETFs and indices we use for our correlation analysis then we can confirm whether it is a good idea to enter the market at the current prices or possibly be patient and wait for a better entry level at a more attractive price. In fact, it is important to mention that entry and exit levels are among the most important factors that determine a trader or an investor’s success on the market.

The XLK tracks an index of S&P 500 technology stocks, including all of the big names associated with the technology sector in the US, such as Apple, Microsoft, Visa, Intel, Mastercard, Cisco, Nvidia, Paypal & others. In fact, the XLK has been among the best performing ETFs in the past decade overall, following the great innovation that we have seen among those leading companies within the sector. They have kept on coming up with new products and services and have practically been leaders in the sector they operate. That of course in turn has been extremely bullish for their share price performance that has been therefore been boosting the XLK, helping it perform so well in the meantime as well. Actually, Microsoft plays an important role within the XLK with its 19% weight within the ETF, making it one of XLK’s top holdings.

By looking at the chart of the XLK, we shall say it looks very similar to MSFT’s overall stock performance. The price has been in a massive uptrend since the 23rd of March last year when the price bounced from the $68 lows to reach the $144 highs in the last week of April. In other words, the price has just more than doubled in the past 13 months, followed by a profit-taking correction towards the current levels at $136 a week later, based on a profit-taking interest after the 100% surge on the price in the past year. In fact though, the price is about to test the key support level at $132 where lots of buying pressure is expected. Even if it breaks that first key support mark it would be testing the next major support mark at $124 where more buying activity is likely to take place. Either way, the price is very likely to bounce from one of those key support levels and make another strong bullish rally especially after the strong earnings results that the leading companies within the XLK have been reporting for the first quarter of this year.

Overall, by analyzing the recent performance of the XLK, we shall say it clearly confirms our bullish stance on the MSFT stock and is giving us more reasons to believe that buying around the current levels would be a reasonable idea.


Chart: XLK


The SPDR S&P 500 ETF (SPY) tracks a market-cap-weighted index of US large and mid-cap stocks and is the best recognized and oldest ETF and typically tops ranking for largest assets under management (AUM). As a matter of fact, the SPY has got $331 billion in assets under management. The SPY is also the ETF with the greatest trading volume with its daily average of $25 billion. Moreover, the SPY is very well diversified thanks to its investments in different sectors on the market. Its biggest holdings are Microsoft Corp., Apple Inc., Amazon.com, Facebook Inc., Alphabet (Google), Berkshire Hathaway, Inc., JPMorgan Chase Inc. & Visa Inc.

Microsoft represents 5% of SPY’s overall portfolio.

By looking at the daily candles of the SPY, we could see the massive bullish rally that the leading ETF has been trading in the past 13 months since the end of March last year. The price has gone up from $218 back then to the current $420 highs in early May. In other words, the price has almost doubled during that period of time as well.

Due to the strong financial performance and better than expected earnings results, the SPY has gone to very high levels already, currently testing the strong resistance at $420, meaning it is possible to see some profit-taking interest at that point. Yet, the strong uptrend is likely to continue as even if the price drops on a profit-taking correction, we would likely see lots of buying pressure at the first support at $410, followed by the major support at $395-$400 where even more buying pressure is likely to take place. In other words, investors and traders who are looking to buy the biggest ETF out there could buy it at those key support levels and at a little discount, giving them a chance to further maximize their profitability to the upside. So, the price is expected to either break that resistance and give further bullish indications in the near future or make a bit of a correction only to test the major support levels and bounce again, boosted by even more buying interest at around those marks.


Chart: SPY


Overall, the recent performance of both the XLK and the SPY clearly confirm our bullish stance on the MSFT stock and we would like to add it to our portfolio.


Conclusion

We at Dow Experts enjoy analyzing the performance of leading industry leaders as well as ETFs and benefiting from their recent financial performance and current market positioning.

We analyze the major fundamental factors, such as overall financial performance and market positioning, earnings results, expectations for the future and others, together with the technical factors and the recent share price performance and indications that the chart gives us in order to be able to maximize our profitability on a stock or an ETF we are analyzing.

Today’s analysis was focused on the recent performance of Microsoft Corp. (MSFT). The company has been a global leader in the technology sector for a long time now and keeps increasing its presence in that highly competitive market, further boosting its financial performance and market positioning and making more money for shareholders and traders.

We have been impressed by the company’s recent financial performance and believe the current share price is giving us an attractive buying opportunity that would give us a chance to maximize our profitability to the upside.

We would start buying MSFT stock at the current $246, just above the first major support at $245. In case the price drops further in the short term, we would be looking to add more to our buy positions at the next key support at $232 in order to get a better average price and be able to make even higher profits to the upside. Our initial profit-taking target would be set at $255-$260, followed by the next target at $275-$280 where we would be fully cashing in our profits and waiting for another profit-taking correction that would give us a chance to buy MSFT again at a strong support and make high profits to the upside in the future.




Sincerely,

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