If an insider is selling a large amount of company stock, it can pay to approach the stock with caution. A substantial insider sale can be a signal that the stock is overvalued or that the outlook for the company is deteriorating.
In this report, we are going to highlight a large insider sale at Microsoft (MSFT:US). Microsoft is one of the world’s largest technology companies. A diversified business, it is a major player in a number of industries including the business productivity, cloud computing, video gaming, and personal computing industries. It is listed on the NASDAQ Global Select Market and currently has a market capitalization of $2.5 trillion.
Microsoft Corp: Insider Selling
Our insider transaction data shows that between November 22 and November 23, Microsoft CEO Satya Nadella sold 838,584 MSFT shares at an average price of $340.26 per share. This sale netted the insider proceeds of around $285 million and reduced his holding to 830,791 shares.
CEO Sells Half His Stake
There are a couple of things that stand out about this sale from Nadella.
The first is that he has reduced his holding from around 1.67 million shares to 830,791 shares, which represents a reduction of approximately 50%. This means that it is quite a large sale in relative terms.
The second is that this sale was not part of a pre-arranged 10b5-1 trading plan. Quite often, when top-level insiders at technology firms sell a large amount of stock, it is pre-arranged through trading plans. We have seen this kind of selling recently at companies such as Alphabet and Amazon. Nadella’s sales were not pre-arranged which makes them more informative from an insider transaction analysis perspective.
Why Did Nadella Sell His MSFT Stock?
Normally, if a top-level insider reduces the size of their holding significantly, we see it as a red flag. In this case, however, we do not see the selling activity from Nadella as concerning.
For a start, Microsoft has revealed that Nadella sold shares for personal financial planning and diversification reasons. This makes sense, as before his sales, his holding was worth around $600 million. The company added that he is committed to the continued success of the company and his holdings (which significantly exceed the required holdings set by the Microsoft Board of Directors). After his sales, Nadella still owns around $300 million worth of MSFT stock, which is a large amount of stock by anyone’s standards.
Secondly, Washington State is shortly about to implement a new Capital Gains Tax. The new tax, which is set to start on January 1, 2022, primarily targets stock and business ownership sales with a new 7% tax on long-term capital gains over the $250,000 threshold.
Third, Microsoft’s recent Q1 FY2022 results were literally flawless. For the three months ended September 30, revenue came in at $45.4 billion, up 22% year on year, and above Wall Street’s estimate of $44 billion. Meanwhile, Non-GAAP earnings per share (EPS) amounted to $2.27, well above the consensus EPS forecast of $2.08.
Putting this all together, it doesn’t look like there’s anything to worry about here.
Having said that, Microsoft shares have had an excellent run over the last year, rising nearly 60%. After that run, the stock sports a forward-looking P/E ratio of about 36, which is relatively high. Nadella’s sales suggest that he sees the stock as fully valued right now.