Bear markets are never fun. But savvy investors know that economic downturns, while painful, can give you a chance to build huge wealth in the stock market by buying stocks of great companies at deep discounts.
One of those great companies is Microsoft (NASDAQ: MSFT). Let’s take a closer look at the company (and the stock) to see if this tech leader presents such an opportunity right now.
The bullish case for Microsoft shares
Powerful global trends are driving Microsoft’s expansion. Businesses are digitizing their operations and moving them to the cloud, driving demand for the tech titan’s productivity software and cloud services. At the same time, billions of people around the world are turning to digital forms of entertainment, fueling the growth of Microsoft’s popular Xbox game console and streaming offerings.
Microsoft’s leadership has positioned the company – and its investors – to profit greatly from these trends. Since becoming CEO in 2014, Satya Nadella has prioritized mobile and cloud-based services, while minimizing traditional desktop software licenses. This decision turned out to be prescient. Microsoft is now positioning itself as a key enabler of the megatrend of digital transformation. And its long-term investors are wealthier for it, despite its recent share price decline.
Microsoft’s strong shareholder returns over the past five years have been driven by its strong financial results. The tech giant continues to generate an incredible amount of profit and cash flow, including $73 billion in net income and $65 billion in free cash flow over the past 12 months. This impressive cash flow has enabled Microsoft to reward its investors with bountiful stock buybacks and an ever-increasing stream of dividend income.
Data on MSFT share buybacks (quarterly) by YCharts.
Microsoft’s incredible cash flow generation and huge cash reserves – which topped $100 billion as of June 30 – also allow it to acquire other attractive growth companies. For example, Microsoft has reached an agreement to buy the video game leader ActivisionBlizzard for the colossal sum of $68.7 billion in January to further bolster its gaming business.
Risks for Investors to Consider
Fears of a potential recession are causing many companies to scale back their technology investments. Proof of this is Microsoft’s decelerating year-over-year revenue growth to 12% in its latest quarter, from 18% in the previous quarter and 21% a year ago. Still, the tech juggernaut’s diverse lines of business and fortress-like balance sheet should allow it to invest in its own operations throughout the current economic downturn. This, in turn, should further strengthen Microsoft’s competitive position against its smaller, less financially strong rivals.
However, a few select competitors can match Microsoft’s scale. Amazon (NASDAQ: AMZN) on the one hand, is actually the market leader in cloud computing services. Amazon Web Services (AWS) has a formidable presence in cloud infrastructure, with a 34% market share, according to Synergy Research Group. Microsoft’s Azure platform is second with a 21% share. This gap may narrow in the coming years as Azure grows at a faster rate than AWS. Still, it’s a battle investors should watch closely.
Apple (NASDAQ:AAPL) and Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) should not be overlooked either. Apple Macs and Google Chromebooks are gaining traction in the personal computer market. Macs hold a significant share of the high-end computer market, while Chromebooks are popular among cost-conscious buyers like schools and students. However, Microsoft’s Windows operating system still dominates the huge business desktop market, with a 76% market share.
Microsoft stock has a reasonable valuation
Like many tech stocks, Microsoft’s stock price is down sharply in 2022. After falling nearly 30%, its shares can now be held for about 23 times Wall Street’s earnings projections for this year and less than 20 times analysts’ estimates for next year. That’s a reasonable price to pay for a technological and financial goliath that is expected to grow its profits by more than 15% per year over the next half-decade.
Income-oriented investors will also appreciate Microsoft’s modest but rapidly growing dividend. Just days ago, its board approved a 10% increase in its quarterly cash payout, bringing its current yield to a respectable (for a tech growth stock) 1.2%.
So, is Microsoft stock a buy?
With its strong position within the megatrends of cloud, gaming, and digital transformation, Microsoft still has many years of growth ahead of it. Although strong rivals continue to pose challenges, the tech giant’s entrenched position and financial strength should enable it to hold off rivals in some markets and expand its presence in others.
Even better, long-term investors now have the option to start or add a position in this proven winner at a significantly reduced price. For all these reasons, Microsoft’s stock today looks like an attractive buy.
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Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Joe Tenebruso has the following options: January 2024 long calls at $100 on Amazon.
The Motley Fool holds and recommends Activision Blizzard, Alphabet (A shares), Alphabet (C shares), Amazon, Apple and Microsoft. The Motley Fool recommends the following options: $120 long calls in March 2023 on Apple and short calls $130 in March 2023 on Apple. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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