Dow component Microsoft Corporation (MSFT) is pursuing TikTok's U.S., Australia, and New Zealand operations in a deal that must be completed by Sept. 15. The hook-up isn't a sure thing, with Chinese opposition and other potential suitors considering bids. The best decision for Mr. Softee could be to walk away from a purchase that co-founder Bill Gates recently called a "poisoned chalice" on par with 2016's ill-fated LinkedIn acquisition.
- Microsoft co-founder Bill Gates called the potential acquisition a "poisoned chalice."
- The tech giant's shares should continue to reward long-term investment, even if a deal fails.
- There are early signs that shareholders are closing out positions.
Microsoft wants a bigger footprint in the social media space, but the company is already firing on all cylinders, posting impressive growth during a worldwide pandemic. And shareholders aren't complaining, with the stock booking an impressive 32% return so far this year and hitting an all-time high as recently as last week. The company has also avoided political controversy, unlike Facebook, Inc. (FB) and Twitter, Inc. (TWTR), with conservatives threatening to take legal action for perceived bias.
The best buying opportunity for sidelined investors at this point may come after a sell-the-news reaction if Microsoft walks away from negotiations, for whatever reasons. Short-term speculative capital will hit the exits if that happens, but Microsoft stock has been a perfect investment vehicle in the past four years and will likely to hit new highs as long as the company doesn't put a noose around its neck with an questionable acquisition.
Speculation refers to the act of conducting a financial transaction that has substantial risk of losing value but also holds the expectation of a significant gain or other major value. With speculation, the risk of loss is more than offset by the possibility of a substantial gain or other recompense.
Microsoft Long-Term Chart (1999 – 2020)
A multi-year uptrend ended at a split-adjusted $59.97 in December 1999, marking the highest high for the next 16 years, and entered a steep decline that found support in the upper teens. Microsoft stock acted poorly through most of the mid-decade bull market, finally breaking out above resistance in the low $30s in 2007. The rally failed in the first quarter of 2008, giving way to an aggressive selloff that finally ended at a 10-year low in 2009. The subsequent bounce took four years to complete a 100% retracement into the 2007 high.
The stock made steady progress into 2016, finally stalling just three points below the 1999 peak. It broke out after the presidential election and eased into a channeled uptick, underpinned by broad retail and institutional sponsorship. A 2018 downdraft got bought aggressively at the start of 2019, adding points into the February 2020 high at $190.70. It then sold off with world markets, dropping 59 points into a seven-month low.
Microsoft Short-Term Chart (2018 – 2020)
The bounce into the second quarter tracked the angle of the prior decline, carving a V-shaped recovery pattern that reached within a few points of the first quarter high in May. It completed a cup and handle breakout about six week later, resuming a bull market advance that posted an all-time high at $217.64 in Aug. 3. However, rally momentum has now waned, yielding a rectangular consolidation with support at the 50-day exponential moving average (EMA) at $198.
The on-balance volume (OBV) accumulation-distribution indicator posted an all-time high on July 10 and rolled into a distribution wave that is still in progress, despite recent speculative interest. In turn, this divergence suggests that shareholders are taking profits, potentially setting the stage for lower prices. Sidelined investors looking to get on board could use the downturn to their advantage, with the potential for a decline into the $180s if negotiations fail.
A cup and handle price pattern on a security's price chart is a technical indicator that resembles a cup with a handle, where the cup is in the shape of a "u" and the handle has a slight downward drift. The cup and handle is considered a bullish signal, with the right-hand side of the pattern typically experiencing lower trading volume.
The Bottom Line
Microsoft stock is getting sold under the surface despite TikTok negotiations, indicating that shareholders have mixed feelings about a potential deal.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.