Why Microsoft Stock is a Buy During the Market Downturn

Many investors these days are understandably wary of tech stocks. The US stock market has had a tough 2022 so far due to macro factors, such as inflation, and tech stocks have been particularly hard hit.

But investors should not overlook Microsoft (MSFT 0.40%). The tech titan’s stock price has fallen with the broader market, hovering around $270 at the time of writing after hitting a 52-week high of $349.67 last November.

The falling stock price creates a potential buying opportunity, but a lower price alone does not justify an investment. After all, this month Microsoft cut its fourth-quarter revenue forecast due to a stronger US dollar. That’s why it’s worth digging deeper into Microsoft’s business to understand why the company is a buy for long-term-minded investors.

Image source: Getty Images.

The strength of the Microsoft cloud

One of the main reasons to invest in Microsoft is the company’s shift to cloud computing as its core offering. This does not mean that Microsoft is ignoring its famous Windows operating system and associated Office software. Windows maintains its dominant position in the market, being used by nearly 74% of desktop computers worldwide.

What has changed is that Microsoft’s ubiquitous Office software is now sold through a software-as-a-service (SaaS) model. Customers pay subscription fees to access software from Microsoft’s cloud, giving the company a predictable, recurring revenue stream. It’s just one of many cloud offerings from Microsoft.

Other cloud products include Dynamics, a SaaS-based customer relationship management platform, as well as Azure, Microsoft’s solution for IT infrastructure and cloud data storage, which ranks just behind Amazonfrom AWS, the market leader in cloud computing.

A focus on cloud-based solutions drove revenue growth of 18% year-over-year during Microsoft’s fiscal third quarter, which ended March 31. Revenue hit $49.4 billion, the latest quarter in a multi-year trend of steadily rising revenue even amid the coronavirus pandemic.

Chart showing Microsoft's overall quarterly revenue growth since 2018.

Data by YCharts.

If we just look at Microsoft’s cloud offerings, business is booming. Over the past year, the company’s cloud revenue has grown steadily every quarter while maintaining strong year-over-year growth.

Trimester Microsoft cloud revenue Annual growth
FY22 Q3 $23.4 billion 32%
EX22 Q2 $22.1 billion 32%
FY22 Q1 $20.7 billion 36%
FY21 Q4 $19.5 billion 36%
FY21 Q3 $17.7 billion 33%

Data source: Microsoft. YOY = year after year. FY = fiscal year.

Microsoft’s cloud business is poised to continue its stellar performance. The cloud computing industry is expected to grow from $706.6 billion last year to $1.3 trillion by 2025, serving as a tailwind for Microsoft.

beyond the cloud

Microsoft’s revenue growth doesn’t stop at its cloud offerings. Other parts of the company’s operations have prospered throughout the current fiscal year.

Microsoft’s digital search and news advertising division saw a year-over-year revenue increase of 29% to $8.7 billion in the first three quarters of the fiscal year. Its professional networking site, LinkedIn, saw revenue rise 38% in the first nine months of fiscal 2022 to $10.1 billion.

Meanwhile, Microsoft’s games division saw revenue rise 10% year-over-year in the first nine months of fiscal 2022 to $12.8 billion. That’s impressive given a tough comparison to fiscal 2021, when the division saw 42% year-over-year revenue growth in the first three quarters, thanks to consumers are spending more time playing video games due to pandemic-related lockdowns, and its Xbox platform launching a new console version.

A resilient business

Like many global companies these days, Microsoft faces multiple macroeconomic headwinds, such as the appreciation of the US dollar, which affects currency exchange rates. That’s important since nearly half of Microsoft’s revenue comes from outside the United States.

However, even in this environment, Microsoft said in early June that it expects fiscal fourth-quarter revenue to reach at least $51.9 billion, down from its earlier forecast of $52.4 billion. dollars due to the appreciation of the dollar, but still a significant increase over last year. $46.2 billion.

Microsoft also pays a dividend, which it started in 2003. The company has increased its dividend steadily for more than a decade, and the dividend is secure thanks to Microsoft’s strong free cash flow, which grew 17% from year-over-year in the third quarter to hit $20. billion while the company paid $4.6 billion in dividends. The stock is yielding less than 1% at its current price.

Microsoft’s free cash flow is only one indicator of the company’s financial strength. At the end of its fiscal third quarter, the company had $104.7 billion in cash, cash equivalents and short-term investments. Total assets were $344.6 billion, compared to total liabilities of $181.7 billion.

With several lines of business achieving year-over-year growth, healthy finances, and a dividend to boot, there’s a lot to like about Microsoft. Once the current macro conditions weighing on tech stocks improve, Microsoft shares are poised to rebound. For the patient investor, this well-run technology company is a good long-term investment.

About Dwayne Wakefield

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