In the latter half of this month, it seems as if the big rally that has sent Microsoft (NASDAQ:MSFT) stock and other big tech stocks to higher prices since January is losing momentum.
After climbing to prices just shy of $350 per share, MSFT stock has experienced a modest pullback.
You may be tempted to “buy the dip,” but keep in mind that further rounds of volatility may be just around the corner. Macro issues continue to persist, and while stocks are officially in a bull market, it may start feeling more like a bear market once again.
So, what does that mean if you own MSFT, sell and head for the hills? No. It also doesn’t mean that, if you were considering adding this early victor in the battle to dominate artificial intelligence, you need to skip out on it entirely, either.
Here’s why.
MSFT Stock and the End to Its Hot Run
Between Jan. 3 (the first trading day of 2023) and June 15, MSFT rallied to the tune of 43.2%. The main reason behind this was the company’s high exposure to the “AI mega-trend.” Today, it’s still up almost 40% on the year.
As one of the early-movers in this space amongst big tech companies, scores of investors jumped into MSFT stock. Some of these investors bought simply to ride the momentum.
Others entered positions with a longer time horizon in mind, on the view that the financial payoff from its first-mover advantage in AI would catapult Microsoft (already in the “trillion dollar club”) to an even loftier valuation.
Alongside so-called “AI mania,” rising confidence that macro issues such as high inflation and interest rates would soon ease also played a role in MSFT’s strong stock price performance.
However, after a more than six-month run, it’s possible that this extended rally is coming to an end.
Following recent remarks from Federal Reserve Chairman Jerome Powell, worries about inflation and interest rates (and their impact on the economy) are rising again. The market is walking back from its “risk on” mindset, and “AI mania” is cooling down.
Why Additional Volatility Works in Your Favor
It’s possible that the latest broad market pullback may continue in the short-term. Tech stocks in particular could cough back more of their 2023 gains, and MSFT stock is no exception. That’s not to say, of course, that another painful 2022-style market sell-off is just around the corner.
However, if you expect to “buy the dip” with Microsoft, and flip for a quick gain, I wouldn’t count on this to be a profitable trade. That said, if you are approaching this stock the right way (as a long-term “buy and hold” position), additional volatility works in your favor.
If fear, uncertainty, and doubt keep climbing, MSFT may experience a moderate decline in price compared to its current high-water mark ($351.47 per share). A move back to $300 per share may not be out of the question, nor would a move back to even lower price levels.
The opportunity to get in at a favorable entry point could emerge in the months ahead.
Again, if you currently own it, the better move is to hold, not sell. In hindsight, the paper losses of today could prove to be tolerable. Microsoft’s substantial long-term price appreciation potential remains very high.
The Takeaway
Last week, I argued that Microsoft’s integration of the technology behind ChatGPT leaves it poised to re-enter high growth mode.
That’s not all. Growth catalysts not directly related to AI are also in play. These include a rebound for the tech sector, after the recent slowdown, plus the company’s expansion of its presence in the video game industry.
According to a recently-released court filing, CEO Staya Nadella’s goal is to take Microsoft to $500 billion in annual revenue by 2030. Hitting this goal would represent cumulative revenue growth of around 136.5%, based on the company’s forecasted revenue for the current fiscal year ($211.38 billion).
With this, there’s a clear takeaway. Depending on your time horizon, buying MSFT stock could still prove to be very profitable, and a no-brainer move if shares continue falling back in the short-term.
MSFT stock earns a B rating in Portfolio Grader.
On the date of publication, Louis Navellier had a long position in MSFT. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article.
The InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
