Source: PaxForex Premium Analytics Portal, Fundamental Insight
Anywhere you look, news about inflation, supply chain problems, a potential recession, and more are confusing investors. In spite of lingering concerns about economic difficulties, some companies are proving that moving forward is still quite possible.
Microsoft's Q4 fiscal 2022 results contain several positive factors. While the near-term perspective remains murky, investors with a long-term view of the future should take a closer look at MSFT stock as a buying opportunity.
While some may rebuke Microsoft for failing to meet Wall Street's forecast for its fast-growing cloud business, or allow stiff competition from Amazon and Alphabet to dissuade them from a positive outlook, the stock's post-reporting gains may indicate an optimistic investor outlook overall.
Unlike smaller tech companies whose stock prices have fallen sharply over the past few months, tech giants like Microsoft have shown signs of resilience even during the quarterly slowdown. Possibly this is because of its ability to generate significant cash flow even in difficult economic conditions.
Just last week, Microsoft announced a new service to expedite the adoption of Oracle workloads on Azure. This is a unique position for Microsoft in the cloud arena because it is the only public cloud provider with direct access to databases running on the Oracle Cloud.
While Microsoft's overall operating expenses grew 14% YoY, the main drivers were investments in cloud computing and LinkedIn's professional and employment-focused site. Those investments seem to be paying off, with LinkedIn's revenue up 26% YoY and Microsoft's total smart cloud business revenue of $21 billion, driven by a 40% YoY increase in revenue from its flagship Azure product. This level of growth is impressive and helps maintain a strong and healthy balance sheet.
Last quarter, Microsoft generated $16.7 billion in net income. While that figure was up only 1% over the same period last year, the company's total net income for the fiscal year 2022 was up an impressive 19% YoY.
This level of sustained profitability has helped Microsoft accumulate quite a bit of cash. At the end of fiscal 2022, the company had $105 billion in cash and cash equivalents on its balance sheet. Over the past couple of years, the company has been funneling cash into other growth areas, and investors are starting to see tangible benefits.
For instance, given the increased focus, Microsoft has quietly acquired several cybersecurity players, including CloudKnox Security and RiskIQ. As with cloud computing, Microsoft also encounters strong competition from Amazon and Alphabet in cybersecurity. But the beauty of cloud computing and cybersecurity is that the total addressable market for each is large enough to allow for multiple competitors. As per the earnings breakdown, Microsoft's security business increased 40 percent YoY.
As of this writing, Microsoft stock is down 14% YoY. If we analyze some key valuation multiples, we see that Microsoft is trading at a trailing price-to-earnings (P/E) ratio of nearly 29 and a forward P/E of 27. Nevertheless, at this time last year, these multiples were 37 and 33 respectively. While this doesn't seem like much of a squeeze, we have to remember that Microsoft has a market capitalization of more than $2 trillion. This implies that the company is shaving off several hundred billion dollars in shareholder value as the multiples shrink.
In times of economic instability and stock market uncertainty, large blue chips can be seen as a safe haven. Considering its strong balance sheet, consistent profitability, and entry into growth markets such as cloud computing and cybersecurity, Microsoft seems to be an appealing long-term buy at this valuation.
As long as the price is above the 275.00 level, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 292.75
- Take Profit 1: 300.00
- Take Profit 2: 310.00
Alternative scenario:
If the level of 275.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 275.00
- Take Profit 1: 265.00
- Take Profit 2: 251.00
