Microsoft stock is a bargain: is it safe to buy the dip?

Microsoft stock price has crashed and moved into a technical bear market, moving from a high of  $553 in December to the current $400.

It has dropped by 27% from its all-time high, with its market capitalization falling from nearly $5 trillion to $2.89 trillion.

This article explores why the stock is falling and whether this sell-off is warranted.

Microsoft stock price technical analysis 

The weekly timeframe chart shows that the MSFT stock price formed a double-top pattern at $551 and a neckline at $495, its lowest level in September last year.

It has crashed below the 50-week and 200-week Weighted Moving Averages (WMA), a sign that bears are prevailing.

The Average Directional Index (ADX) has jumped to 28, its highest level this year, a sign that the downtrend is strengthening  

At the same time, the Relative Strength Index (RSI) has continued falling and has now moved to the oversold level of 30. It is the first time it has dropped to this level in over five years.

Therefore, the stock will likely continue falling in the near term, potentially to the key support level at $345, its lowest level in April last year. This target is about 15% below the current level.

The stock will then bounce back later this year as investors buy the dip and as the company becomes a bargain.

The bullish case for the MSFT stock price 

Microsoft stock price has crashed in the past few months, moving from $550 to the current $400, its lowest level in April last year.

This crash has mirrored the performance of other software companies like Adobe, ServiceNow, Intuit, and Salesforce.

Investors are concerned that these companies will be disrupted by the artificial intelligence sector.

The sell-off gained steam after the company published its financial results.

Data showed that the productivity and business processes rose by 16% in the second quarter to $34 billion, while the intelligence cloud rose by 29% to over $32.9 billion.

While this was a strong growth trajectory, its cloud growth was much lower than expected.

The stock plunged as the company pledged to continue growing its capital expenditure this year.

It spent over $37.5 billion in the second quarter, higher than the $34.9 billion it made in the first quarter.

The company plans to spend billions of dollars in the coming years.

Microsoft stock will likely rebound as its growth is still strong despite the recent weakness.

At the same time, the company’s valuation has become more friendly in the past few months. 

Data compiled by Seeking Alpha shows that the forward price-to-earnings ratio has dropped to 23.9, lower than the five-year average of 31.

Also, the ratio is slightly higher than that of the S&P 500 Index despite that its growth is much higher.

The same is true with the Rule of 40, which shows that it has become a bargain.

Its profit margin is 40%, while its forward revenue growth is 16%, giving it a multiple of 56%.

Therefore, the company’s group momentum and its valuation means that it will likely bounce back.

This mirrors the general view that it is always good to buy when the rest are fearful, which is happening with Microsoft.