Why Microsoft's Stock Is Breaking Down

(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of GOOGL.)

Microsoft Corp's. (MSFT) stock has held up relatively well amid a broader market sell-off, dropping 12% off its high while other mega tech stocks such as Amazon.com Inc. (AMZN), Netflix Inc. (NFLX), Alphabet Inc. (GOOGL), and Facebook Inc. (FB) have suffered far more dramatic declines. But that may be of little solace to investors. Technical analysis indicates Microsoft may drop 6% further from today's levels, which would push the stock 17% off its highs - with more potential declines to come.

Additionally, bearish options bets for expiration in December directionally support the weak technical chart.

This sobering outlook for Microsoft contrasts with strong fiscal first quarter results that led analysts to raise their estimates. 

MSFT data by YCharts

The chart shows that the stock has fallen below a long-term uptrend, a bearish indication. Additionally, Microsoft is flirting with a technical support level at around $102. Should the stock fall below that level, the shares could drop to the next level of support at $96, a drop of 6% from their current price around of $102.70.

The relative strength index is also trending lower, a sign that bullish momentum is leaving the stock. 

Another negative indication is bearish options bets for expiration on December 21. The puts outweigh the calls by a ratio of 5 to 1 at the $100 strike price, with 10,000 open put contracts. The puts suggest the stock may fall to $96.30. 

Despite the bearish outlook for the stock, Microsoft reported strong fiscal first-quarter results, with earnings beating estimates by 18% and revenue coming in 4% better. Due to the strong results, analysts raised earnings and revenue estimates by about 1%. 

Analysts have also boosted full-year estimates, and now see earnings rising this year by 14% from prior estimates for growth for 11%, a striking contrast to many high-profile tech stocks with falling earnings and slashed forecasts by analysts. The same is true with Microsoft's revenue, which is now expected to grow by 13% from previous estimates of 11%. Those growth rates are expected to remain relatively stable through the year 2021. 

MSFT EPS Estimates for Current Fiscal Year data by YCharts

Microsoft's stock seems, inevitably, to have become increasingly pulled into the broader tech stock downdraft. But the company's robust earnings and revenue growth may provide a firewall against the worst declines experienced by many of its large competitors.

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.