Source: PaxForex Premium Analytics Portal, Fundamental Insight
Many investors are understandably wary of technology sector stocks at this time. The U.S. stock market is having a tough 2022 because of macroeconomic factors such as inflation, and technology stocks have been hit particularly hard.
But investors shouldn't lose sight of Microsoft. The share price of this tech titan has fallen along with the broader market and at the time of this writing is hovering around $270 after hitting a 52-week high of $349.67 last November.
The decline in the stock price creates a potential buying opportunity, but the decline in price alone does not justify the investment. After all, Microsoft lowered its fiscal fourth-quarter earnings forecast this month because of the strengthening U.S. dollar. That's why it's worth delving into Microsoft's business to see why the company is worth buying for investors who are focused on the long term.
A key reason to invest in Microsoft is the company's move to cloud computing as a core offering. That doesn't mean Microsoft is ignoring its famous Windows operating system and related Office software. Windows retains its dominant market position, with nearly 74 percent of all desktops in the world using it.
What has changed is that Microsoft's ubiquitous Office software is now sold on a software-as-a-service (SaaS) model. Customers pay a subscription fee to access the software from Microsoft's cloud, giving the company a predictable, ongoing revenue stream. This is just one of Microsoft's many cloud offerings.
Other cloud products include Dynamics, a SaaS platform for customer relationship management, and Azure, Microsoft's IT infrastructure and cloud storage solution, which is second only to Amazon's AWS, the market leader in cloud computing.
The focus on cloud solutions drove an 18 percent year-over-year increase in revenue for Microsoft in its fiscal third quarter, which ended March 31. Revenue reached $49.4 billion, the latest quarter in a multi-year trend of steady revenue growth, even amid a coronavirus pandemic.
Looking only at Microsoft's cloud offerings, business is booming. Over the past year, the company's cloud revenues have consistently increased each quarter, maintaining a strong year-over-year growth rate.
Microsoft's cloud business will continue to perform strongly. Cloud computing is projected to grow from $706.6 billion last year to $1.3 trillion by 2025, serving as a tailwind for Microsoft.
Microsoft's revenue growth isn't limited to cloud offerings. The company's other businesses have also thrived this fiscal year.
Microsoft's digital search and news advertising division increased its revenue by 29% to $8.7 billion in the first three quarters of the fiscal year. Revenue at professional networking site LinkedIn rose 38% to $10.1 billion in the first nine months of fiscal 2022.
Meanwhile, revenue for Microsoft's gaming division grew 10% to $12.8 billion in the first nine months of fiscal 2022. That's impressive, considering the stark comparison to fiscal 2021, when the division's revenue grew 42% year-over-year in the first three quarters, thanks to consumers spending more time playing video games because of store closures due to the pandemic and the Xbox platform releasing a new version of the console.
Like many global companies these days, Microsoft faces many macroeconomic headwinds, such as the strengthening U.S. dollar, which affects foreign exchange rates. This is significant because nearly half of Microsoft's revenue comes from outside the U.S.
Even under such circumstances, however, Microsoft said in early June that it expects revenue in the fourth quarter of its fiscal year to be at least $51.9 billion, down from the previous forecast of $52.4 billion because of the strengthening dollar, but still well above last year's $46.2 billion.
Microsoft is also paying a dividend that began in 2003. The company has been steadily raising dividends for more than a decade, and the dividend is solidly protected by Microsoft's strong free cash flow, which rose 17% year over year to $20 billion in the third quarter, while the company paid out $4.6 billion in dividends. At the current price, the stock yields less than 1%.
Microsoft's free cash flow is just one indicator of the company's strong financial performance. At the end of the third fiscal quarter, the company had $104.7 billion in cash, cash equivalents, and short-term investments. Total assets were $344.6 billion, while total liabilities were $181.7 billion.
With several lines of business achieving year-over-year growth, healthy financial performance, and dividends on top of that, Microsoft has a lot to cling to. Once the current macroeconomic conditions weighing on tech stocks improve, Microsoft stock is poised for a rebound. For the patient investor, this well-managed technology company is a good long-term investment.
As long as the price is above the 262.50 level, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 264.65
- Take Profit 1: 277.00
- Take Profit 2: 291.00
Alternative scenario:
If the level of 262.50 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 262.50
- Take Profit 1: 253.00
- Take Profit 2: 246.00
