Will Microsoft Be The Next $1 Trillion Company?
The race is on. After Apple and Amazon briefly became trillion dollar companies in 2018, investors are rushing to find the next behemoth. One of the top candidates is Microsoft, which at the beginning of April 2019, had a market capitalisation of $913.15 billion - inching ever so close to the coveted title.
In this article, we explore what market capitalisation is, whether or not Microsoft can make it to the trillion dollar club, and the potential trading opportunities around it.
What Is Market Capitalisation?
When investors or analysts refer to a company's market capitalisation or market cap, they are referring to the total dollar value of all the company's shares held by investors (commonly called outstanding shares). The metric is calculated by multiplying a company's outstanding shares by the current market price of one share.
For example, a company with 50 million shares selling at $100 per share would have a market cap of $5 billion (50 million multiplied by 100). The size of a company, or the market cap, is a useful measure because it can help investors with managing portfolio risk. Typically, the market cap of companies are split into three separate groups:
- Large-cap companies: These companies typically have a market cap of $10 billion or more. They are companies that have been around a long time, offer stability and a steady rise in share price and dividend payments.
- Mid-cap companies: These companies typically have a market cap between $2 billion and $10 billion. These are generally companies that are in the process of expanding and while they are deemed higher risk than large-cap companies, they offer more growth potential.
- Small-cap companies: These companies typically have a market cap between $300 million and $2 billion. These are generally companies that are new and are considered high risk due to their age and size.
Microsoft fits firmly in the large-cap group which is why its race toward a trillion dollar valuation has already gathered so much attention from investors and analysts. Can the company do it? Let's find out.
Will Microsoft Be The Next $1 Trillion Company?
It's no secret that many investors had left the Windows and Office company for dead, largely thanks to the astonishing growth in competitor Apple. However, Microsoft is likely to go down in the history books in how a company can reinvent itself. Currently, the company's market cap has surpassed that of Apple.
The turnaround in the company has largely been due to a change in leadership and strategic vision. As recently as 2013, former CEO Steve Ballmer, bought out mobile phone maker Nokia in a vision to make Windows devices the ones to own, once again.
Just five years later, new CEO Satya Nadella, shut down Windows as an operating division and split the team into two new divisions for Azure Cloud Computing and Office 365. It is cloud computing which has investors most excited. After all, the sector is expected to grow into a $400 billion industry by 2020.
If Microsoft can reach a $1 trillion market cap, it will be largely due to the growth of its cloud computing services.
Source: Ycharts
Trading Microsoft Stock Towards A $1 Trillion Market Cap
It is estimated that Microsoft needs to trade around the $130 per share price level, to be considered a trillion dollar company (provided the share count remains the same). With the stock price opening at around $118 at the beginning of April 2019, there is still some ways to go.
However, some analysts have already placed Microsoft on their 'outperform' list, with RBC Capital Markets suggesting a $130 price target. That's all good in theory, but what does the price chart show us? After all, a price chart is the truest representation of all the buyers and sellers of Microsoft stock.
Source: Admiral Markets MT5 Supreme Edition, MSFT, Weekly - Data range: from December 27, 2015, to April 2, 2019, accessed on April 2, 2019, at 12:44 pm BST. Please note: Past performance is not a reliable indicator of future results.
It is clear to see from the above weekly chart of Microsoft's stock price, that buyers are in control of the market. This clear trend can help traders identify their trade direction bias. Viewing the lower timeframes such as the daily chart can help in timing trades with entry, target and stop loss levels.
In the daily chart below, Microsoft's stock price is trading above the 20 exponential moving average, as shown by the blue wavy line. Moving average indicators are useful in identifying long term trends, but are also useful in identifying areas of support or resistance for traders buy and sell within.
Source: Admiral Markets MT5 Supreme Edition, MSFT, Daily - Data range: from November 26, 2018, to April 2, 2019, accessed on April 2, 2019, at 12:49 pm BST. Please note: Past performance is not a reliable indicator of future results.
In Microsoft's case, buyers have been stepping into the market when the stock trades around the 20 exponential moving average. And on March 8, ended as a bullish pin bar reversal, also known as a hammer candle.
Traders could have entered on the break of the pin bar's high at $111.70. A stop loss could have been placed at the pin bar's low at $108.80. Trading with a volume of 10 lots, which is the equivalent of 10 shares, then if the entry price was triggered and then went to hit the stop loss, the trader would have lost approximately $29.
In this instance, the stop loss was not hit. If the trader trailed their stop loss to the low of each buyer bar, the stop loss would have been executed on March 22, at $117.40. This would have resulted in an approximate profit of $57.
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