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Look Past Possible Near-Term Negatives With Microsoft (MSFT) Stock

Although Microsoft (NASDAQ:MSFT) stock has moved higher in recent weeks, don’t count on a smooth path back to its previous high. At least while external uncertainties, plus concerns more direct with the company, could potentially cloud investor sentiment for the software giant once again.

Factors like a continued rise in interest rates could resume putting pressure on its valuation. Certain aspects of the recently passed Inflation Reduction Act may also be seen as a negative for shares. Even as the company’s latest financials and guidance suggest it’ll stay resilient during a recession, worries about the impact of an economic downturn may again apply pressure.

So, with this in mind, is selling into strength the best move? Not so fast. Not only are these concerns “small potatoes” at worst. These negatives fail to outweigh the numerous positives that continue to make this stock a solid long-term holding.

MSFT Stock: Post-Earnings Rally and Potential for a Pullback

As mentioned, Microsoft shares have moved up lately. Although the Big Tech powerhouse reported quarterly numbers last month that fell short of estimates, the release was well-received by investors. Why?

For starters, the company’s cloud unit reported strong year-over-year revenue growth of 28%. More importantly, management’s guidance called for double-digit growth this fiscal year. This, plus the overall rally in tech stocks, is why MSFT stock has made its way back to near the $300-per-share mark. Yet it remains to be seen whether shares can continue to quickly move back to prices north of $300 per share.

Or, will there be another pullback? The Federal Reserve appears set to keep raising interest rates until inflation is under control. Microsoft could be subject to new taxes introduced by the Inflation Reduction Act. Investors could start perceiving this as something that could be a drag on earnings going forward.

Promising guidance notwithstanding, worries about a recession’s impact on Microsoft’s operating performance may crop up again. Especially ahead of its next earnings release this fall. Any of these short-term negatives may result in the stock pulling back toward lows hit earlier this year (under $250 per share).

Why Potential Negatives Are Minimal at Worst

The various factors listed above could send MSFT stock lower in the coming months. Still, it’s important to keep something in mind. These negatives, at worst, will only have a minimal impact on future performance.

Its valuation may already account for present and future Fed rate hikes. Shares have already taken a nearly 13% hit year-to-date. Today’s valuation of 28.5x earnings is reasonable given its expectation of double-digit growth.

Tax changes from the Inflation Reduction Act aren’t as bad as some headlines suggest. Microsoft’s effective tax rate is already above the new minimum (15%) for large corporations. The stock buyback tax, an excise tax of 1%, likely will not discourage it from conducting big buybacks in the future. After all, it’s done so in the past. The boost to earnings per share from buybacks will likely continue to outweigh taxes paid.

As for renewed pessimism about how it fares in recession? The company’s greater focus on large enterprise customers could mean it’s still on course to remain resilient during a downturn. High exposure to trends like cloud computing will also likely help offset potential cuts in corporate IT spending.

Bottom Line on MSFT Stock

Beyond the fact that concerns about possible near-term negatives are overblown, it’s also important to keep in mind long-term positives continue to outweigh them. The company’s cloud business, led by its Azure platform, could carry on experiencing high growth.

Further success with its newer offerings, like its Teams teleconference platform, will also help it stay in growth mode. In fact, Citi’s Tyler Radke, in a downgrade of Zoom (NASDAQ:ZM) stock, pointed to growing competition from Teams as a key reason behind the change in his rating.

Couple this growth with the strength of its more mature operating units, and it’s hard to see Microsoft’s status as an all-weather tech holding changing anytime soon.

In short, don’t view any weakness from here with MSFT stock as a sign to sell. Instead, view it as an opportunity to buy. MSFT stock earns a B rating in my 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.

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