- Shares of the second most valuable company in the United States, Microsoft, have fallen 30% from their peak in November 2021.
- Last month, Microsoft posted its weakest quarterly revenue growth in five years.
- As this weakness persists, many analysts have lowered their price targets for MSFT over the past month.
Like its counterparts in the high-tech sector, Microsoft Corporation (NASDAQ:) has not escaped the market downturn this year. Shares of the second most valuable company in the United States are down 30% from their peak in November 2021.
However, after such a massive downward move, many investors, like me, wonder if now is the right time to take advantage of this weakness and buy MSFT shares, which have proven to be a very profitable and safe investment in the course of the last decade.
Even after the recession, investors who bought MSFT stock five years ago and held it realized total returns of more than 150%. In contrast, the technology-heavy NASDAQ-100 index has returned around 60% over the same period.
Technological sinking
In a note to clients earlier today, Goldman Sachs said the current rally was temporary and forecast the market to bottom in 2023. The investment bank said that while valuations had fallen this year, they had done so mainly in response to rising interest rates. In addition, the bank noted that investors have yet to price in earnings losses associated with a recession.
Some analysts believe the tech giants will remain under pressure for many years to come as they face sharply rising service and wage costs that will weigh on their growth.
Microsoft is not completely immune to these headwinds. Last month, the company posted its weakest quarterly revenue growth in five years, hurt by the strength of and weak sales of Windows software to personal computer makers.
As this weakness persists, some analysts have lowered their price targets for MSFT over the past month, given the near-term headwinds. However, the stock remains outperformed at Investing.com.
Source: Investing.com
The bullish scenario
While it’s unclear just how far the current bear market may go, there are plenty of reasons to support the Redmond, Washington stock over the long term.
First, Microsoft is firmly entrenched in the digital economy thanks to its diversified business model, which includes a suite of Office products, cloud services and a video game unit.
Although Microsoft’s revenues and margins are under pressure, the company is well positioned to weather economic downturns thanks to its diversified business and pricing power.
The company’s cloud computing business has been the main driver of the stock’s surge over the past five years, during which time its CEO, Satya Nadella, has ventured into new areas of growth, primarily focusing on cloud computing.
The latest results have clearly shown this strength. While MSFT’s sales of Windows software to PC makers slowed significantly in the prior quarter, demand remained strong for cloud computing services.
src=
Source: Investing Pro
Sales of Azure services, which run and store enterprise software applications, as well as web-based versions of Office productivity programs, rose 42%, excluding currency effects. This unprecedented growth in cloud computing still has many good years ahead of it.
According to a new report from Grand View Research, the global cloud computing market is expected to reach $1554.94 billion by 2030, growing at a CAGR of 15.7% between 2022 and 2030.
Microsoft’s Azure unit, second only to Amazon.com’s (NASDAQ:) AWS web services group in cloud infrastructure services, is likely to be one of the main beneficiaries of this upward cycle.
Microsoft’s strong balance sheet and dividend program provide another solid reason for investors looking to take refuge in today’s uncertain times. MSFT currently pays $0.68 per quarter, an annual return of 1.13%.
But with cash reserves exceeding $130 billion, the company has enough firepower to back its stock with share buybacks and dividend hikes. Microsoft is one of two publicly traded companies to earn the highest triple-A rating from Moody’s Investors Service and S&P Global Ratings, the two largest lending companies.
Conclusion: Should we buy Microsoft stock?
It’s hard to predict when the market will bottom out in a bear cycle, but one thing is clear to me: companies like Microsoft, which have strong economics and powerful products, are going nowhere. That said, this market downturn may offer investors with a long-term investment horizon a chance to take a position in this excellent company for steadily growing returns.
Disclosure : As of this writing, the author is long on the MSFT action. The opinions expressed in this article are solely those of the author and should not be considered as investment advice.