When financial traders are willing to buy a stock at any price, that’s not a good sign. It’s hard to be a contrarian with Microsoft (NASDAQ:MSFT) now, as MSFT stock continues to steamroll ahead on artificial intelligence hype.
Yet, no company – not even the almighty Microsoft – can remain a darling of the markets forever.
I’m certainly not suggesting that Microsoft is a bad company or that its shares will go to zero. Rather, I’m calling for level-headed thinking.
As the old saying goes, you won’t lose money by taking profits – and Microsoft’s long-term shareholders might want to consider profit-taking in 2023.
| MSFT | Microsoft | $335.02 |
Everyone, Everywhere Loves Microsoft Now
There’s no denying it: Microsoft established an early-mover advantage in generative AI when it invested billions of dollars in ChatGPT developer OpenAI.
Today, OpenAI’s generative AI technology is embedded in Microsoft’s Bing search engine and Azure cloud services, among other products.
These facts are known and widely celebrated. I might exaggerate a bit here, but it feels like 1999 again as everybody and his uncle is enamored with Microsoft. There’s even some love for Microsoft in China, where the government isn’t known for supporting American tech businesses.
According to a recent report from Reuters, Chinese President Xi Jinping met with Microsoft co-founder and former CEO Bill Gates. The report stated that Xi “said he welcomed U.S. firms including Microsoft bringing their AI tech to China.”
It’s highly unusual for a top Chinese official to openly welcome a U.S. technology firm like this. Microsoft isn’t just the darling of the stock market now; it’s the toast of the town on multiple continents.
A Rational Look at MSFT Stock
Previously, I suggested that MSFT stock “might need to pull back before it can move forward.” Today, I’m standing by that warning even if it people might scoff at it.
Microsoft’s most recent earnings report was back in April. Microsoft generative AI tech integration has been going on for a while.
Yet, there’s a steady stream of reports of Microsoft notching a “record high valuation” and of MSFT stock closing at fresh highs. Meanwhile, hardly anyone wants to mention that Microsoft’s trailing 12-month price-to-sales ratio has reached 12.29x. For reference, the sector median P/S ratio is 2.88x.
Microsoft’s TTM price-to-book ratio of 13.08x is substantially higher than the sector median P/B ratio of 3.22x. Microsoft is richly valued amid a tech sector that is, itself, richly valued.
So, Is It Too Late to Buy MSFT Stock?
The concept of “too late” depends on your time horizon as an investor. It wasn’t a great idea to invest in Microsoft in late 1999. Yet, that investment would have paid off eventually.
Still, it’s important to time your trade properly. Contrarians shouldn’t be enticed by the overwhelming optimism surrounding Microsoft in 2023. And, if valuation still matters to anyone, then Microsoft is currently too richly valued to be attractive as an investable business.
So, I do believe it’s too late to buy MSFT stock right now, but you might get a second chance if it pulls back. I’m watching $310 as a more reasonable buy price, so stay tuned as a drawdown could provide an excellent opportunity.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
