An Anatomy Of A Market Price Shift Using Microsoft

“Davidson” submits:

Hindsight is the best form of self-education. This is especially true when honing one’s investment skills. With the thousands on thousands of market predictions provided every year, few take the time to review market performance with financial performance and include simple changes in market psychology. Hindsight is most useful when comparing market performance against concurrent market psychology and financial performance.

Microsoft (MSFT), the 2nd largest component of the SP500 next to Apple (AAPL), provides a good example of the ‘mind-over-matter’ irrationality of market prices that has confused and frustrated investors for centuries. Many believe that Modern Portfolio Theory(MPT) of Nobel Laurate Markowitz(1952), the basis of accreditations globally for business, is the best model for investing. MSFT’s history as told through charts of its share price and financial metrics tells us markets are not as simple as ubiquitously taught  MPT.

MSFT has been under a greatly-respected new CEO guidance since Feb 2014 and since Jan 2016 has soared just over 330% to become the 2nd largest component to its long-term rival APPL. APPL soared 345% over the same time period. What drove these price expansions? Was it Revenue expansion, an expansions in margins and Net Income? What occurred here that resulted in 300% gains for these already well known and substantial companies? The answer may be startling!

(Click on image to enlarge)

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MSFT is used as the example because of its record of consistent management with smooth CEO transitions from Bill Gates to Steve Ballmer in 2000 and then from Ballmer to Satya Nadella in 2014. Very favorable market opinion with Gates as CEO slipped substantially under Ballmer has since been revived under Nadella.  The financial performance reveals very healthy Revenue growth and margins which fell once Nadella took the reins In 2104. Gross Margins have not recovered even though Operating and Net Income Margins have returned to when Ballmer was CEO. The recent pop in Net Income came as a result of MSFT’s tax rate dropping from a normalized 20%-30% range to ~11% in 2019. There have been no increases of any magnitude that would justify the surge in MSFT share price since 2016. AAPL’s metrics even though showing excellent business margins reveal Revenue slowed dramatically with the passing of its creative-force Steve Jobs in 2012. AAPL’s Revenue growth since 2015’s $233Bill to 2019’s $260Bill has been 2.7% annually. So this justifies a 345% price gain?

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Disclosure: The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or ...

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