Change is occurring all around us. Yes, the US is suffering a hangover of the financial collapse, which occurred 5 years ago which only time can seem to heel. At the same time structural change is occurring in many sectors of the economy making uncertainty the only certainty for participants and observers alike. I will leave it to others to profess where we are heading in this fast paced world, myself I have fun trying to reconcile what I see in my mathematical world of model price charts and extrapolate this world to the world of possible reality. The latest observation I’m making is the negative transit of EBV+5 occurring in Microsoft.
Here is the current Model Price chart as of Friday, with MSFT’s September balance sheet.
Microsoft with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
For those interested, a daily updated chart of MSFT subsequent to this post will be maintained on Facebook, here.
Also, here is the long term Model Price chart on MSFT.
Microsoft with monthly price bars, EBV Lines (colored lines) and model price (dashed line)
My point here is that Microsoft, which has been a public company since 1986 and has traded above EBV+5 for 26 years looks to be breaking or transited down through EBV+5. Too me this event is amazing and historic. I’m not saying Microsoft is going to go away anytime soon. I’m saying in our Model Price work, EBV+5 has important relevance and what it says about the company. The monopoly or dominance for Microsoft is truly over in “the market’s eyes”. And if I’m right, that this is truly a negative transit, than EBV+5 support becomes resistance.
Let me review an example of this with the long-term chart of Intel Corporation (INTC)
Intel with monthly price bars, EBV Lines (colored lines) and model price (dashed line)
At the beginning of 2006 you can see Intel broke down through EBV+5. Late in 2007 Intel tried to rally up to EBV+5, however EBV+5 becomes resistance and Intel couldn’t transit above EBV+5.
Back to Microsoft
What we are seeing in the marketplace with Microsoft is nothing short of dynamic. Four years ago, Windows devices, personal computers accounted for 95% of the internet-connected devices. In 2011, this was down to less then 50% and projected to be less than 20% in 2014. Software development on Windows platform has all but stopped. Developers now focus on the web and mobile with Apple operating system (iOS) and open source (Android). One sees Microsoft playing catch up with mobile devices of its own and of course the just released tablet, Surface. Reviews of these products is rather mixed. The elephant in the room with Microsoft is what happens to enterprise technology spending by major corporations. As corporations shift to giving employees smart phones and tablets instead of notebooks and personal computers obviously sending less money to Microsoft in the future.
Again, let me emphasize Microsoft is not going away. Microsoft will make tons of money and pay out billions in dividends, however the equity markets are about valuation. Microsoft will probably trade in the future at a valuation that will be less than anytime in its’ 26 year history.
The last four weeks Microsoft has traded lower in a very innocent fashion, probably not alarming anyone in the marketplace. This is what I love about our model price charts – little price moves can mean big things. As this blog post suggests, history is being made here with Microsoft and this latest price move. Is anybody listening?
P.S. I have written about Microsoft in the past.(here) Back on February 16, I suggested that holding Microsoft for a period of a year in which the stock price followed EBV+5 would imply a return to investors, with dividend, of 24.4%. As Microsoft’s balance sheet grows so does EBV+5. For instance, EBV+5 one year out or October 2013 is projected to be $39.75 (earnings less stated dividends added to the net worth of the company). So investors can make money being invested in Microsoft, I am not suggesting otherwise, as the stock price can move up to EBV+5 at any future date. What I am suggesting in this blog is a more discerning point about EBV+5, valuation and what this says about the company and its’ future in the eyes of the market.