The broad US stock market kicked off April in high gear, with the S&P 500 having already risen 3% in only a few days. Performing even better has been the tech-rich Nasdaq, which is up about 5% for April and is now hovering around all-time highs.
Catching the updraft is Microsoft stock. Shares of the cloud and software company have gained a whopping 7% this month, adding to its already strong year-to-date performance. Microsoft is now valued at $1.9 trillion, the highest that it has ever been.
Very soon, another 5% of gains to be precise, shares of the Redmond-Washington tech giant could join Apple stock in the select group of US-based companies worth $2 trillion.
What could send Microsoft beyond $2 trillion
There is something peculiar about Microsoft’s business model. Unlike Apple, for example, whose revenues come predominantly from the iPhone (about half of total sales), Microsoft’s P&L is much more diversified.
Roughly one-third of the tech giant’s top-line results is produced by each of its three main segments: business productivity (e.g. Office and Dynamics), intelligent cloud (e.g. Azure) and personal computing (e.g. Xbox and Surface). Also, much of Microsoft’s revenues are recurring and somewhat predictable by nature – think subscriptions for cloud software and LinkedIn, etc.
The stability of Microsoft’s business model probably explains why the stock has been the least erratic within the FAAMG group. Annualized volatility for the past five years, since around the time CEO Satya Nadella took over the company, has been only 18% – against Amazon and Apple stocks’ 28%-plus.
For this reason, it is unlikely that one big variable or event will propel Microsoft stock beyond the $2 trillion mark. Instead, what will do so is likely a combination of factors that should include:
- Secular shift to cloud solutions that should increase cloud infrastructure revenues and likely expand software margins;
- A change in work habits that favors the home office, a plus for business productivity offerings like cloud storage and Skype;
- The tablet-as-a-PC trend that favors Surface;
- The new video game console cycle that was recently kicked off with the long-awaited introduction of the Xbox Series X and S.
Not always a straight shot
As Microsoft approaches the $2 trillion valuation, one might wonder if the landmark might even mean anything. Could investor sentiment be impacted by how close the stock gets to the round number? Could it deteriorate, or instead get a boost past the checkpoint towards new highs?
Judging by recent history, I find it plausible that the $2 trillion mark might have a psychological impact on investors. Think of Apple stock.
Shares of the Cupertino company climbed fast past the $2 trillion valuation in August 2020. But then, they traded within a narrow band, never quite surpassing the $2.4 trillion mark and dipping below $2 trillion several times in the past six-to-eight months.
Amazon stock, on the other hand, has never even reached Microsoft’s current $1.9 trillion valuation. But for the past nine months or so, shares seem to turn back around and decline whenever they touch the $1.7 trillion level. See chart below.
This could be a sign that investors might get hesitant about valuing a company’s equity close to or above $2 trillion. It remains to be seen if Microsoft stock will face the same challenges, or if it will merely zip past the milestone.
I asked Twitter if Microsoft could cross the $2 trillion market cap checkpoint soon, or at all. Here are the answers to the poll:
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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Apple Maven)