With one trading day left in the month, is Microsoft stock a buy in February? Or should long-term holders sell?
This fresh take on the long-term leader among tech stocks and growth companies pinpoints the fundamentals, technicals and fund ownership factors that are influencing the stock's recent action.
The last several weeks display a stock market struggle for the giant in enterprise software, cloud computing, tablet PCs and video gaming hardware, as well as for fellow megacap techs. And this week, MSFT has gotten hammered nearly 4% and looking poised to finish lower for the fifth week in a row.
Thursday's action was especially bearish.
Notice how Microsoft stock wiped out its intraday gains, fell 1.8% by day's end, and finished almost at session lows.
Plus, MSFT drew a negative outside day. That is, the session's high and low were "outside" the respective high and low of Wednesday's rebound day. For long investors, you'd much prefer an outside day to the upside, not the downside.
Ultimately, a stock price is determined by the laws of supply and demand. Growth investors focused on making money right when a potential leader is poised to make a bullish breakout past a proper buy point should consider looking closely at the stock's chart action across multiple time frames.
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Quantum Chip Boosts Demand For Microsoft Stock
Following the three-day Presidents Day holiday weekend, a three-day rebound hinted at newfound momentum. But shares dove nearly 3% over that two-day span from Friday last week to Monday. Shares then undercut 400, an important share price level for Microsoft stock.
Microsoft stock gained some ground Wednesday, cutting its loss for the month to 3.7%. Yet it's sharply underperforming a 1.6% decline by the S&P 500.
Shares last week rallied on news that it's debuting a new chip to handle quantum-level processing tasks. The Majorana 1 will assist quantum-level computers become "capable of solving meaningful, industrial-scale problems in years, not decades." And on Thursday last week, MSFT outperformed the stock market today with a 0.5% rise to 416.13. It staged a third straight gain, only the second time accomplished so far this year.
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Is Microsoft Stock A Buy?
First, let's do a quick check on the fundamentals. According to IBD Stock Checkup, Microsoft ranks first among stocks in the desktop software group. However, a 62 Composite Rating on a scale of 1 to 99 falls well short of the ideal level of 90 or higher.
The IBD Composite Rating combines metrics in earnings, sales, profit margins, return on equity with measures of the stock's relative strength vs. all companies in IBD's database. On top of these factors, IBD layers in the quantity of buying vs. selling in Microsoft stock plus industry performance.
Microsoft's 89 Earnings Per Share Rating is quite good. It means the business software and cloud computing giant's earnings have grown at a quicker pace than 89% of all stocks in the Investor's Business Daily database of more than 10,000 stocks.
The Redmond, Wash., firm's long-term profit track record is one reason why the stock's EPS Rating is sound. In fiscal 2018, the company earned $3.88 a share. In FY 2024, earnings jumped 20% to $11.80 a share. With 7.44 billion shares outstanding, that's net income of $87.7 billion.
The financial media and some analysts, however, harbor some pessimism over the potential return on heavy capital spending by the likes of Microsoft and its cloud computing and business software rivals as the world enters a new chapter in artificial intelligence.
"As colleague Andrew Bary wrote in this space last week, Meta Platforms, Microsoft and Alphabet are estimated to spend $200 billion on AI this year, equal to about one quarter of their revenue," Randall Forsyth wrote in Barron's "Up & Down Wall Street" column for the Feb. 17 issue.
"Given China-based DeepSeek's reported ability to produce an AI model for a fraction of the cost of U.S. AI companies, this raises questions about American exceptionalism, or at least the payoff from the billions U.S. tech giants are sinking into AI investments," Forsyth added.
Earnings Remain Strong
In terms of EPS Rating, Microsoft ranks No. 2 in its industry group behind Adobe.
Going beyond the EPS Rating, Microsoft's profit picture looks solid but not spectacular.
Wall Street consensus forecasts call for earnings in the current fiscal year ending in June to rise 11% to $13.15 a share, a slight downward revision. Still, that's more than quadruple what the firm earned in fiscal 2018 ($3.88). Fiscal 2026 earnings are seen accelerating slightly, up 14% to $14.95 a share.
The company's return on equity in fiscal 2025 was terrific at 37%. IBD research has found that many of the great stock market winners showed an ROE of at least 17% at the start of their moves. During recent decades, ROEs have climbed past 20% among top growth stocks. Strong profit margins have also boosted MSFT's Sales + Margins + Return on equity (SMR) Rating to a stellar A on a scale of A to E.
Go to IBD Stock Checkup to see the SMR Rating of any company in the IBD database.
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Technical Action Today: Start With Monthly Chart
Looking at a monthly chart of Microsoft stock, the megacap tech is clearly not leading the stock market higher. Since reaching an all-time high of 468.35 in July, shares have treaded water, even as the S&P 500 and Nasdaq continued their course of higher highs and higher lows.
Notice too how in the months of July and December last year and January of this year the stock reversed bearishly off its monthly highs and closed practically at the bottom of their monthly price ranges. Such reversals point to an unsettling eagerness among fund managers to dispose of shares.
Nonetheless, Microsoft is not a sell now given the fact that over the long term, it has continued to mark a series of higher highs and higher lows. It's still made upward price progress since a breakout from a four-month base at 366.78 during November 2023.
A further decline, however, that threatens to wipe out all of the gain from the 366.78 pivot point would serve as reasonable grounds for recent investors to sell shares and protect profits.
Weekly Action
Let's check out the weekly chart.
It shows a eight-month consolidation pattern in the works. Microsoft stock is trading more than 16% off its peak. It's also trading bearishly below its 10-week and 40-week moving averages, a no-no for any stock that is preparing to break out of a good base and launch a run of new highs.
A great stock normally trades above these technical levels right before a powerful breakout to new highs — the best time to grab shares for growth investors.
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Microsoft's Strength Vs. Rest Of Market
Another way to get a handle on the technical action? Consider using IBD's unique Relative Strength Rating.
Compared with all other companies in the IBD database, Microsoft stock currently gets a lowly 31 Relative Strength Rating. This means Microsoft has outperformed only 31% of all stocks over the past 12 months. Four weeks ago, it was a mediocre 58; six months ago, the RS stood at 71.
MarketSurge, meanwhile, notes a 24 score for the six-month RS Rating. And the three-month rating? Also weak at 24. This means Microsoft stock has outperformed only 24% of all companies in the IBD database over the past three months.
Picking the best growth stocks absolutely involves selecting those that are already outperforming their peers before they stage a new strong run.
When a stock breaks out of a well-formed base, you normally want to see the Relative Strength Rating exceed 80 on a scale of 1 to 99. In some cases, when the base gets extra long (think six months or longer), you can expect the rating to be lower than 80. It's not uncommon for excellent large and megacap stocks to bust out of bases and race to new highs even though their RS ratings are in the 50s or 60s.
Microsoft Stock And Institutional Sponsorship
Finally, fund sponsorship remains favorable and is perhaps the strongest leg in the three-legged stool of analyzing Microsoft in terms of fundamental, technical and institutional ownership criteria.
However, mutual funds owning Microsoft stock have dipped in the past two quarters. According to MarketSurge, fund ownership has fallen from what appears to be an all-time peak of 10,619 in the quarter ended June 30, 2024, to 10,537 in Q3 and 10,463 in Q4 of the same year.
Among members of the IBD Mutual Fund Index, MFS Growth Fund (MFEGX) trimmed its stake in Microsoft by nearly 400,000 shares in Q4 last year to 12.67 million. MFS is the nation's oldest mutual fund company. JPMorgan Large Cap Growth (JLGMX) reduced its holding in Microsoft stock to 20.68 million shares in Q4 last year vs. 22.21 million the prior quarter.
IBD's Accumulation/Distribution Rating has weakened to D- on a scale of A to E. A grade above C is preferred. This rating analyzes 13 weeks' worth of price-and-volume action. Prefer a stock with either an A or B grade, as it would indicate large funds are net buyers of a stock.
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Final Analysis
Microsoft is off to a soft start in 2025. The megacap tech now has a year-to-date loss of 6%. The Nasdaq composite is down 4% while the S&P 500 holds a fractional loss over the same time frame.
All in all, amid an IBD-style analysis of the three above-mentioned key factors, Microsoft stock is not a buy now.
Please follow Chung on X/Twitter: @saitochung and @IBD_DChung
