Summary
- Microsoft’s shares are underperforming the broader market in 2024, with technical indicators pointing to a potential price breakdown below $400.
- Valuations are extremely high, with a forward EV to EBITDA of 20x and sales of 11x, signaling a possible 20% to 30% decline in stock price.
- The dividend and free cash flow yields are notably low, making the stock less attractive compared to risk-free Treasury rates.
- Rising competition in AI and increasing CAPEX costs may flatten growth—my recommendation is to sell, with a price target around $300 by 2025.
Microsoft (NASDAQ: MSFT) continues to underperform relative to the broader market, as I’ve pointed out over the past year. My recent analysis highlighted technical weaknesses, such as a decline in the 14-day Ease of Movement indicator, which often signals larger price drops. Since then, Microsoft has clearly underperformed compared to the S&P 500 and NASDAQ 100 indices.
Technical Analysis The technical pattern for Microsoft looks concerning in the second half of 2024. Analyzing an 18-month daily price chart, the price appears to be slipping below its 250-day moving average for the first time since early 2023. In November, the stock was already below the 200-day MA, and the 50-day moving average has been consistently declining since July.
For technical purists, a head-and-shoulders pattern seems to be forming, with the “head” created in July, one shoulder in March-April, and the other shoulder emerging since September.
Relative momentum against the S&P 500 has been disappointing, with a lag of -11% since May 2023 and -18% since July. On-Balance Volume has been declining since January, signaling a lack of buying interest. The record-low 14-day Ease-of-Movement reading in late July and early August suggests a lack of buyers, while selling pressures could send prices lower.
Overvaluation Indicators Microsoft’s valuation remains far above historical averages. The forward EV to EBITDA of 20x and sales multiple of 11x are unsustainable compared to past levels. I anticipate a 20%-30% price decline could be necessary to bring the stock back to 10-year valuation averages, assuming a growth rate of 10%-15% in earnings and sales.
Further, the trailing dividend yield of 0.74% and free cash flow yield of 2.35% are low, especially compared to the risk-free 1-year Treasury yield of 4.4%. Why would investors settle for such low returns when risk-free options offer higher yields?
Final Thoughts The AI narrative has been a key driver for Microsoft’s high valuation, but increased competition and rising CAPEX costs could flatten growth. The partnership with OpenAI for AI advancements has been widely discussed, but OpenAI is rumored to be entering the search market, posing a direct challenge to Microsoft’s Edge and Bing, as well as Google’s Chrome and Search services.
While Microsoft has strong potential in cloud and enterprise software, AI advancements come at a high cost. I expect Wall Street’s optimistic earnings projections for 2025 and 2026 to prove too high.
Investors’ Perspective To stay ahead, investors need to consider a few key factors: If the economy improves under upcoming political changes, if interest rates remain low, and if AI demand stays strong, Microsoft may maintain its position. However, if these factors shift, the stock could face significant declines.
I recommend placing stop-sell orders below $390 as a cautionary measure for uncertain shareholders. Alternatively, selling covered calls can hedge against downside risks while generating income.
I continue to rate Microsoft as a “Sell” with a 12-month outlook. A target price of $300 is possible by 2025, even without a recession, based on long-term valuation adjustments.
