Is This $3-Trillion Price Tag Too Little?
The downfall of most traders is two words: Greed and boredom.
And boredom, in my opinion, is the most destructive of the duo.
Too many traders trade to trade.
There’s a siren’s song to do something – anything – as we sit there in front of our computer screens watching the market’s gears churn.
But that’s the fastest and easiest way to go broke.
Now, I don’t get swept up in the intraday bobs and weaves of the indexes. I give them very little thought or attention. And that’s because I have a series of trend systems I’ve built that provide me with a roadmap for the months and year ahead.
I want to live my life, not be handcuffed to my computer.
But when I do turn my attention to short-term trades, I focus on one thing and one thing only: predictability.
And here, my pioneering trading approach shines the light on the best opportunities, even during the market’s most chaotic chain of weeks… earnings season.
The Next $3-Trillion Company
Over the next several days, we’re going to hear earnings from some of the market’s biggest and most influential companies. And that includes my No. 1 stock for 2023.
I’ve stated there’s only one company to really watch if you want to know where the markets are heading…
And that’s Microsoft (MSFT).
Part of the reason is basic math.
The tech mega-cap accounts for 6.5% of the Dow Jones Industrial Average… 6.86% of the S&P 500… And 9.91% of the Nasdaq 100.
It’s the second-largest component of each of the major indexes.
On top of that, Microsoft is smack dab in the center of 2023’s hottest trend: artificial intelligence (AI).
The company began investing in OpenAI all the way back in 2019… but no one gave two shakes about it then. Not until OpenAI released ChatGPT last November.
Microsoft’s stake in the AI start-up is now $13 billion. Though this 49% stake could potentially be worth $100 billion. And Microsoft has added AI to all its products in its Office 365 suite, including Copilot.
But the most important is this is rolled into Azure.
Most everyone I know operating in the tech space is tapping AI, specifically through Azure because it can easily spit out any front ends or coding they require.
Morgan Stanley sees this dominance as providing significant upside for tech’s mega-cap royalty. And that it has the potential to be a $90 billion incremental opportunity for Microsoft by its fiscal year 2025. For reference, we’re now awaiting the company’s fiscal year 2024 first quarter earnings. So, this is much sooner than you might think.
Morgan Stanley has a $415 price target on Microsoft shares. And they’re currently trading at roughly $331. So, that’s an upside of 25.4% and would take the company into the $3 trillion market cap club…
Oppenheimer & Co. has a $410 price target for Microsoft… which would also be a $3 trillion valuation.
So, what I’m getting at here once again is where Microsoft goes, so goes the rest of the market.
Year-to-date, shares of Microsoft are up roughly 38%. That’s outperforming every index, including the Nasdaq 100 proxy the Invesco QQQ ETF (QQQ) – which is up 34%.
And if we want to know where the market is heading next, we need to know where Microsoft is heading.
A 75% Chance of Success
In September, shares of Microsoft experienced their worst monthly performance since December 2022.
But I’m here to tell you, that isn’t reason for concern.
Microsoft shares are averaging a loss of 5.32% in the month over the last five years. So, this year’s 4.7% pullback was right in line with those expectations.
October is traditionally a much stronger month for the mega-cap tech. And we can already see they’ve gained 3.3% this month.
Now, much of this historical success has to do with the company’s fiscal year first quarter earnings release. This market mover takes place in the later parts of the month. And Microsoft will release these results tomorrow after the closing bell.
Current expectations are for $54.5 billion in revenue with earnings of $2.65 per share.
But I can tell you, a lot of the focus is going to be on net profit margins. ChatGPT is expensive to run, and Copilot is eating into short-term profits. Of course, over time this should even out as price increases are introduced and general overall efficiencies.
When we look at my VertEA strategy, we see why Microsoft tends to enjoy a solid October…
Over the last 12 years, shares have fallen on this report only three times. That’s a 75% success rate. And our average one-day move on Microsoft’s first quarter earnings is a gain of 2.17%. That makes it the company’s best-received earnings report of the year.
Why is that?
Well, Microsoft – like a lot of companies – has a “sawtooth” pattern in terms of revenue. That means it's uneven… but uneven in the same pattern. For instance, Microsoft reported $56.1 billion in revenue in its fiscal year fourth quarter back in July. This is one of its strongest in terms of sales, but worst in terms of share price reaction to the report. And that’s thanks to forward guidance being lower.
Well, its fiscal year first quarter is soft in terms of revenue (remember expectations are $54.5 billion, a step down from last quarter). But the strongest when it comes to market reaction. Again, the propellant is guidance. The outlook for the company’s second quarter – the holiday quarter – is currently $58.4 billion in revenue.
Remember, VertEA isn’t built on randomness. There is a method to the madness, underpinned by fundamentals.
Microsoft shares have enjoyed a fantastic 2023. All eyes on Wall Street will be focused on the margin impacts of ChatGPT tomorrow evening. But the trend here is friendly. Yes, the tech mega-cap shares have fallen on first quarter earnings in two of the last three years, but one of those was the pandemic in 2020 and the other was the bear market in 2022.
The reality is, the long-term 75% success rate means we should see Microsoft – and the QQQ – move higher on earnings tomorrow. And that $3 trillion-price tag could prove conservative in the long run.
Too many times, traders sacrifice quality for quantity. They get bored. They feel the need to do something, often because they don’t know what to do. And that’s the most dangerous strategy. But by focusing on predictability – on quality, high probability trades – you can spend less time and energy worrying about the markets and spend more time doing all those things you’re building wealth to do.
Siding with probabilities, not panic,
Matthew
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© 2023 Matthew Carr
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This market commentary is opinion and for entertainment purposes only. The views and insights shared by the author are based on his many years of experience covering the markets. But they are subject to change without notice and opinions may become outdated. And there is no obligation by the author to update any information if these opinions become outdated. The information provided is obtained from sources believed to be reliable. But the author cannot guarantee its accuracy. Nothing in this email should be considered personalized investment advice. Investments should be made after consulting your financial advisor and after reviewing the financial statements of the company or companies in question.