MAXIN GLOBAL FUND - USD is a Long / Short Directional hedge Fund incorporated in Luxembourg. It started trading on February,22 2022 and replaces MAXIN ADVISORS' MODEL PORTFOLIO which has been trading since January 1st 2014.
Microsoft May Hold The Key to the Direction of the Markets
The beginning of the Year has seen a typical relief rally after difficult year in 2022. Investors are optimistic again, inflation is declining China’s economy is faring better than anticipated and bond yields have been rather stable.
Our roadmap ahead and the technical set-up calls for a decline in US equities going into February, testing the 3800/3700 levels on the SP500, a rebound in April / May towards 4’100, maybe even 4’300 before recession takes hold and sends equity markets tanking over the summer with an ultimate target for this bear phase between 2’800 and 3’200.
However, we are in the middle of the Q4 2022 earnings season and next week will see the release of the earnings of the US tech giants.
Amongst them Microsoft is probably to watch the most closely, and its results could actually trigger a deeper sell-off than we expect for now, considering its weight in the indexes.
Microsoft is a darling of Wall Street, if not the preferred investment of US investors.
91 % of analysts rate it at BUY, 7 % a HOLD and only 1 Analyst rate it a SELL and that was actually published today.
Many of the top firms on Wall Street like Goldman Sachs , Morgan Stanley or Bank of America have actually named Microsoft as a “Top Pick For 2023”.
In 2022, the two main tailwinds of Technology stocks, and stocks in general for that matter, inflation and interest rates have morphed into significant headwinds, as the discounted value of future awning have plummeted due to higher discounting rates. As a result, MSFT shares declined by 28 % last year and its market capitalisation dwindled by USD 750 Billion.
Moreover, with the economies decelerating markedly in Q4 2022, sales and revenues are bound to be less favourable and there has been many warnings by CEO’s about the difficult market conditions in their businesses.
Investors are sometimes blindsided by their own view on individual stocks and fail to hear what the people at the helm are saying themselves.
On 4th January, Microsoft’s stock fell by 5% as Satya Nadella, Microsoft’s CEO issued a serious warning for technology investors. In his interview with CNBC, Nadella provided a grim outlook for technology companies:
“The next two years are probably going to be the most challenging because, after all, we did have a lot of acceleration during the pandemic and there’s some amount of normalization of that demand and, on top of it, there is a real recession in large parts of the world. The combination of pull-forward and recession means we will have to adjust“
A number of analysts downgraded their rating on the stock warning of a sharp deceleration of its main growth business, cloud computing.
Microsoft is a great franchise business, but it is not immune to the broader economy. The tech giant is set to release its Q2 FY2023 ( Q4 2022 ) quarterly report on 24th January 2023.
Over the last six months, Analysts have revised down Microsoft’s revenue and earnings estimates for FY2023 by 3.5% and 6.5%, respectively.
The consensus of analysts now expects the company to report Quarterly revenues of USD 53 Billion, Net profits of 17. 23 Bln and EPS of USD 2.32, numbers that still indicate growth when compared to the previous year similar quarter.
For its Fiscal Year 2023, Microsoft is expected to grow revenue and earnings at 7.25% and 3.67%, respectively.
A drastic growth deceleration from previous years, that leaves Microsoft trading at very expensive levels on a Price-to-Earnings basis. Microsoft’s free cash flow yield of 3.5% is lower than most (risk-free) treasury bonds at this moment in time. The sheer lack of equity risk premium means Microsoft is priced for perfection, and there is absolutely no room for error.
At its current share price of USD 240, Microsoft trades on 26x earnings, 10.3x Book value and a hefty 8.9x sales.
Using quantitative valuation models such as TQI, Microsoft’s fair value is USD 161.26 per share, or a market capitalisation of 1.2 Trillion), or hefty 33 % discount form its current share price.
What makes us nervous is that neither the pricing nor the forecasts are taking into account the current contraction in global activity.
Microsoft is service company that is extremely dependent on the economic cycle and on the sales and usage of industrial products such as PCs or games.
Over the past few years, cloud services have been the high growth area of Microsoft together with LinkedIn.
The recent downgrades by analysts all relied on the assumption that as of the last quarter, sales of cloud services have been decelerating sharply and should not match the growth of previous years. This segment represents 34 % of MSFT sales
The second and largest franchises of Microsoft is Windows operating system which commands a 76 % share of the market and its Office Suite of Product that is also extremely dependant of PC sales, for growth.
Unfortunately, and this does not seem to be taken into account by analysts, the world’s shipments of personal computers in the fourth quarter of 2022 declined by 28.8 % according to the International Data Corporation’s worldwide quarterly personal computing device tracker, with only 67 million units shipped against 92 Million in the same quarter of the previous year.
For the whole of 2022, Worldwide shipments of PC declined by 16.3 % to 292 million units, with most of the decline accelerating sharply in the 4th quarter of 2022.
With this kind of environment, and Windows and PCs representing 35 % of MSFT sales and an even higher proportion of its profit margins, we are at loss to see how the company could deliver any growth in revenues or profits in Q4 2022, vis a vis either the previous quarter or when comparing to the same quarter of the previous year
As of the summer quarter, Microsoft’s growth has already decelerated to 10.60%, and its operating margins had started to decline too. By all metrics, Q4 2022 should be MUCH WORSE than the summer quarter.
Analysts are still putting high growth expectations ahead beyond the 2022 trough.
However, during the Great Financial crisis of 2008, Microsoft’s revenues declined by -17%, and operating margins compressed significantly. We don’t see how things would be different today, as we enter a sharp economic contraction ahead.
Finally, besides Microsoft’s CEO warnings that seem to be falling on deaf ears, Microsoft announced today it was cutting 10’000 jobs or 5 % of its workforce. This significant piece of news confirms to us that things could be much worse than the market expects.
MICROSOFT is sitting on a crucial support level of a triangle that will reach its nadir very soon.
If it breaks to the downside, the stock has the potential to fall extremely sharply towards the 150 and the 110 levels.This is exactly what happened with META or NETFLIX in 2022 as their results disappointed the markets
In conclusion, we do not think that the stock price or the analysts projections factor in the sharp economic downturn that started in the 4th quarter of 2022.
Next weeks results could bring very nasty surprises for overly bullish investors who do not seem to be listening to MSFT CEO’s warnings.
Considering its weight in the indexes, and Apples’ same configuration with sales of iPhones and sales of Notebooks where it commands 7.5 % of the world market, a sharp break down in these two stocks could actually take the global equity markets much lower than our current road map predicts.
MAXIN GLOBAL FUND
Transaction Update 17 January 2023
Today, we have taken more profits in China, pulling entirely out of our domestic CSi 300 ETF with a 16 % profit, we also took profits on our corporate bond in TELECOM ITALIA,, we increased our short positions in AMZN, AMD; and TSLA and sold more EUR against the US dollar.
New Asset Allocation
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