Cheap Microsoft stock could drop further before recovery

Microsoft stock has crashed into a technical bear market after plunging from $550 to the current $372. This retreat has coincided with the ongoing sell-off in software stocks and as concerns about its massive capital expenditure continues. So, will the stock rebound now that it has become a bargain?

Microsoft stock has plunged amid AI disruption fears

The ongoing MSFT stock crash has coincided with the drop of other software companies like Adobe, Atlassian, AppLovin, and ServiceNow. Investors are simply concerned that their businesses will be disrupted by new AI tools by companies like Anthropic and OpenAI.

Microsoft stock has also dropped as concerns about Copilot, its AI tool continue. While millions of customers are using its free version, only a small percentage of them are willing to pay for it. Instead, customers are opting for other mainstream tools like Claude, Grok, and ChatGPT. 

Most importantly, investors are concerned about the growing capital expenditure and whether the company will have a return on its investment.

Microsoft spent $37.5 billion in capital expenditure in the last quarter, up by 66% from the same period a year earlier. And the management plans to spend over $100 billion in capital expenditure this year. While this investment is good, investors are now waiting to see its incremental value in its earnings.

There are concerns that the company’s business is slowing down. Its most recent results showed that its revenue jumped by 17% to $81.3 billion, while its net income rose by 60% to $38.3 billion. Its productivity and business processes made $34.1 billion, while the intelligent cloud made $32.9 billion.

Wall Street analysts expect that Microsoft’s revenue will grow by 18% this year, with the growth slowing to 15% in the next financial year. 

On the positive side, there are signs that the company has become a bargain. For example, Seeking Alpha data shows that the company has a forward PE ratio of 21, which is slightly higher than the S&P 500 Index average of 20. The multiple is lower than the five-year average of 33 and the sector median of 31.

Microsoft is also a bargain based on the rule-of-40 calculation, which looks at a company’s revenue growth and its margins. In this case, it has a net profit margin of 39% and a revenue growth of 16%, giving it a multiple of 55%.

Analysts are largely bullish on the MSFT stock price, with the average estimate being that its stock will jump by 58% to $588. Some of the most bullish are from companies like UBS, New Street Research, and Bank of America, who see the stock hitting $500.

Microsoft stock analysis suggests more pain before rebound

MSFT stock price chart | Source: TradingView 

The three-day chart is sending a warning sign to investors. It formed a double-top pattern at $550 in July and October last year. A double-top is a common bearish reversal sign in technical analysis.

The stock is now about to form a death cross as the spread between the 50-day and 200-day Exponential Moving Averages narrows.

There are signs that the stock is slowly forming an inverted cup and handle pattern, which often leads to more downside. It is now in the cup section.

These patterns mean that the stock may continue falling, initially to the key support level at $341. This support coincides with the 61.8% retracement level and the lowest swing in April last year.A move below that level will point to more downside towards the 78.6% retracement level at $282.