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  1. Home
  2. / Investing
  3. / Stocks

As We Await Tesla's Results, Let's Assess Whether to Touch Microsoft

Would-be traders and investors need to understand that the software giant's stock isn't cheap by any measure.
By BOB BYRNE Jan 25, 2023 | 08:30 AM EST
Stocks quotes in this article: QQQ, IWM, SPY, DHI, MSFT, TSLA

I'm not sure how to describe Tuesday's equity index price action other than Dullsville.

The Invesco QQQ Trust (QQQ) spent the day bouncing on either side of the session's volume-weighted average price (VWAP), and while the iShares Russell 2000 ETF (IWM) and SPDR S&P 500 ETF (SPY) both held above their VWAP for most of the session, it was an undeniably quiet trading day.

Sure, traders had plenty of single-story stocks to trade. If you were quick on the keyboard, you had time to sell D.R. Horton (DHI) short between the $98.50 and $100 window we discussed on Tuesday. The homebuilder beat expectations, but new orders fell short. All in all, DHI's report wasn't bad, but the stock has rallied more than 30% since early November, so in my mind that makes the risk of a sell-the-news reaction pretty high.

Another significant report from yesterday came after the regular session closed when Microsoft (MSFT) announced better-than-expected results driven by strength in cloud computing, but then ruined the good mood by delivering disappointing guidance.

I understand that many investors consider Microsoft a must-own in any growth or long-term investment portfolio, but to be clear, this stock isn't cheap.

The last time I invested in, not traded, MSFT was in 2012. At that time, the stock's price-to-sales (P/S) ratio was around 3.5, its price-to-earnings (P/E) ratio was around 12 or 13, and its free cash flow yield was more than 11%. Today, Microsoft sports a P/S of about 9, a P/E of about 26, and a free cash flow yield of nearly 3.5%. There's a big difference between a great company and a great investment. MSFT is a wonderful, albeit overpriced, company at its current valuation.

If you want to trade Microsoft, go right ahead. Just don't ignore the lower lows and lower highs from beneath the 200-day moving average over the past year. If, however, you're looking for a reason to invest in MSFT over the long term, the stock returned around 22% annualized since its 2009 bottom. I suspect the stock is due for several years -- not months -- of underperformance and sideways consolidation.

As far as earnings are concerned here on Wednesday, about a hundred thousand of my closest friends and I are curious to hear what Elon Musk has to say after the bell about Tesla (TSLA) . While I won't take a position into the report, it's worth noting that the stock is up 40% over the last 11 trading days and the 14-day relative strength index is above 82. Assuming the volatility remains high during the after-hours trading session and following the earnings report, I'd look for dip buyers camped out around $126 to $130 and sellers from $163 to $165. But again, Tesla bulls and bears are highly emotional. If you're going to jump into this mine field, you better have nerves of steel.

(MSFT is a holding of Action Alerts PLUS. Want to be alerted before the portfolio buys or sells these stocks? Learn more now.)

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At the time of publication, Byrne had no positions in the stocks mentioned.

TAGS: Earnings | Investing | Stocks | Technical Analysis | Trading | Software & Services | Technology | Real Money | Earnings Preview | Electric Vehicles

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