Shares of tech titan Microsoft (MSFT) was one of the few big tech companies to give investors what they wanted this earnings season. With solid momentum and an optimistic outlook, MSFT stock was initially rewarded until the rest of the market dragged it lower again. Undoubtedly, it is difficult for non-energy stocks to maintain positive momentum these days.
As the resilient big-tech titan looks to surpass the $2 trillion mark in market capitalization once again, it could bring some relief to the rest of this struggling market. Microsoft is not just an influential company; it’s a leader that may prove too cheap at these levels, now down about 23% from its all-time high just north of $340 per share.
At 27.74 times its earnings, Microsoft may not be the cheapest of the big tech group. Still, it’s arguably one of the most undervalued, given its remarkably resilient quarter in the books.
Although a recession could drive Microsoft’s multiple even lower, it seems to be one of the more qualitative names in the market. I remain optimistic about the title.
Investors are quickly forgetting Microsoft’s stellar quarter
Microsoft’s Azure flexed its muscles in the third quarter, helping the company achieve magnificent revenue growth of 18% year over year. Despite the pace and confidence of management, Microsoft is not immune to the effects of a recession.
This market is so influenced by inflation and rate hikes that it’s easy to forget that there are solid companies out there that can continue to thrive despite the gloomier conditions.
With the risk of recession increasing, there is a real possibility that Microsoft will fail. Although I don’t consider management’s constructive advice to reduce the chances of a recession in the next year. The company is fully aware that the economy could get worse. Still, its businesses are firing on all cylinders, so it might be able to weather the storm much better than its rivals.
Recently, the company announced plans to slow down hiring in its Windows and Office groups. Many tech companies have frozen hiring or downsized amid tougher economic times. Although Microsoft may significantly slow down hiring, they have noted their intention to raise salaries for existing employees.
The combination of pay rises and hiring breaks is a rather odd mix and probably a sign of the times.
Indeed, it has become much more difficult to retain talent in the era of the “great resignation”. At the same time, the recent hiring and layoff freezes seem to indicate the first signs of an economic slowdown.
Undoubtedly, job prospects vary depending on the industry. For service positions, it is difficult to hire at the moment. In the technology sector, where most market-wide sales have been concentrated, companies are feeling the pressure to cut costs. Microsoft seems to be in the middle. His stock took quite a hit, but not as much as the stock of your average high-tech innovator.
Can Microsoft Keep Running As the Economy Fades?
Going forward, it’s the high-growth Azure business that could continue to drive strong results for Microsoft, even as rate hikes dampen economic growth. Of course, an economic downturn could take a lot of breath out of Azure sails. Still, it will be interesting to see if the tailwinds of digital cloud transformation can offset the seemingly impending recessionary pressures.
Moreover, it is still too early to conclude that the Federal Reserve will cause a hard landing for the economy as it plans to raise rates higher to put the inflation genie back in the bottle.
At this point, management seems cautiously optimistic. Microsoft seems to be more cautious with new roles in specific segments like Windows and Office. However, the company still seems to be going full throttle with Azure.
Additionally, if the Activision Blizzard (ATVI) pass, I’d be looking for the games division to really heat up as Microsoft looks to add more content to its video game library.
Additionally, supply chain issues will ease over time, and more gamers will finally be able to get their hands on the latest generation of Xbox consoles. Indeed, the gaming industry has catalysts that should help steady Microsoft’s ship as it moves through the rougher waters of the market.
The Taking of Wall Street
According to TipRanks analysts’ rating consensus, MSFT stock is looking like a strong buy. Out of 24 analyst ratings, there are 23 buy recommendations and one hold recommendation.
Microsoft’s average price target is $357.01, which implies an upside of 30.66%. Analyst price targets range from a low of $298.18 per share to a high of $411.00 per share.
Microsoft Stock Basics
Microsoft stock was the only bright spot in big tech this year. As the economy grinds to a halt, I think investors are currently underestimating the company’s ability to pull through.
The company may be slowing down hiring in some divisions, but it’s not about to put the brakes on Azure or gaming anytime soon. Both segments could help stay afloat as economic conditions continue to deteriorate.
With its brilliant CEO Satya Nadella at the helm, the juggernaut is in excellent hands as it endures another year of unprecedented challenges.
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