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Investment Thesis
Microsoft (NASDAQ:MSFT) is down more than 30% from its recent highs. In fact, the Microsoft sell-off gained momentum and dropped more than 20% in about 6 weeks. This is the momentum that future textbooks will be written on about!
I explained where I see an echo of the dotcom bust. While continuing and arguing that analysts are unable or unwilling to read the room. That Microsoft’s EPS consensus numbers need to come down.
At the same time driving home at the point of time to be bullish on Microsoft is now.
Finally, I offer practical tips to think about in the current investment environment.
Reminiscence of a Past Bust
When I started investing, I read about the dot-com bust. I thought, what would it feel like? What would I do in those moments?
I read how all my value investing idols have different coping strategies. As I plow countless graphs reflecting the carnage that technology was left behind. And from that experience, I drew my own versions of what I was going to do.
And what I observed again, the most painful aspect of the whole sell-off was the bear market rally. Bear rallies would have killed me. And that is exactly what I believe kills the investor.
It’s not necessarily the bear market but the sharp rallies below that pull you back, to grind lower. That constant ripping and mowing of investors’ capital, coupled with the lack of enthusiasm to throw good money after bad money is what I remember about the dot-com bust.
What’s Happening Now?
When a bear market starts, it starts slowly. There was just some air let out because so many people were anchored to the price they witnessed just a few weeks ago. There is not enough widely accepted recognition that the fundamental dynamics have changed. And slowly but surely, more and more are waking up from the trance.
At first, there was no action. Then, some people buy some dips along the way. Then, as things progressed, the buy-and-hold crew didn’t want to do anything. In fact, the whole meaning of buy and hold is that the group is sticking to their guns.
But as Microsoft begins to fall more than 25% from its previous highs, there is a sudden awakening of the masses. And people are starting to ask tough questions about their stock investment. And at that point, investors will start selling.
That is the mass awakening, the mass selling, that describes the final phase of the bear market. Indiscriminate selling.
However, I believe that if there was ever a time to sell Microsoft, that time has passed. This is not the time to sell! And here is what one should think.
Thinking Ahead, What’s Next?
MSFT earnings consensus estimates
Here is what we see above. The red arrow points to the summer when indications are that inflation will be more persistent than investors originally believed. And you can see that fiscal Q1 2023 (upcoming earnings) has been revised downward, and that makes sense.
What I believe analysts are missing, is that the next twelve months are imperative further revised downwards. Why?
Because everywhere we look, from FedEx (FDX), ServiceNow (NOW), AMD (AMD), and Micron (MU), all of these broad global companies have offered recent guidance and they collectively describe a challenging backdrop in supplies, from inflation, or in cloud enterprise spending. The writing is on the wall.
Embracing Reality
The reason analysts fail to adjust earnings estimates next quarter is because there is a misplaced belief that the impact of a potential recession won’t significantly affect enterprise companies. After all, large businesses in particular are the companies best capitalized to weather the chaos.
However, I believe that while they can withstand turbulence, they are not recession-proof.
As such, I maintain that analysts will be forced to revise fiscal Q2 2023 (ending December 2022) and fiscal Q3 2023 (ending March 2023) earnings estimates.
And at this stage, you pause and think, “I thought you were bullish” on Microsoft. And this is my thesis, that the Street needs to start revising its earnings consensus more aggressively to regain credibility.
Currently, there is an unwillingness to get too far ahead of the curve, to recognize the truth. There is no point in taking career risks. But we know from the big global companies mentioned above that things stop outside, it’s not hard to read the room.
MSFT Stock Valuation – 25x EPS This Year
Here is what I believe is the likely scenario. Microsoft’s fiscal 2023 (ends June 2023) EPS will be about 5% to 10% lower, than current estimates.
Let’s say 10% for the purposes of our discussion. That suggests Microsoft’s EPS will come in at $9.14 rather than the $10.16 current estimate.
This would put Microsoft at 25x this year’s EPS. Now, I’m not going to pretend to argue that I find this bulk cheap, no!
However, here are two reasons why I think this is an attractive time to enter.
First, I revised down Microsoft’s EPS estimates to adjust for the new reality underway.
Second, I recognize that Microsoft’s customers, businesses, from all over the world, will be the first places to come back after the recessionary period.
And here’s the appeal of investing in Microsoft, it’s a toll bridge to the digitalization of the world.
Key Takeaway: How to Invest, Back to Basics
When it comes to investing in bear markets, there are 4 things that are important to recognize.
- The last part of the bear market, that moment of final surrender is a necessity for the end of the bear market.
- That last rinse to everyone investor enthusiasm is the most painful part.
- The absolute bottom won’t stay there for too long.
- No one rings the bell to let you know it’s time to enter.
As we look at Microsoft today, it’s like throwing money down the sink. However, after considering these 4 elements, what you are left with is a period that lasts about 3 or 6 months of throwing good money after bad money.
But every time one sticks to the dollar cost averaging process, one can be sure that price averaging will perform well when we come out the other end into the next bull market.