Source: PaxForex Premium Analytics Portal, Fundamental Insight
Microsoft has grown exponentially in its nearly 50 years in business. Despite the recent market downturn, the company's stock has risen more than 200% in the past five years, thanks to the strength of brands like Xbox, Windows, Azure, and Office. The success of these brands and market share will likely help the company continue to grow for years to come.
Since January, however, Microsoft stock has fallen 29%, along with a long list of other technology stocks. Investors who don't follow the latest market trends may be puzzled as to why a leading company like Microsoft experienced such a steep drop in 2022. Let's look into it.
Microsoft was among the many technology stocks hit by rising inflation and slowing consumer demand in 2022. Although the company's stock price fell 29 percent over the year, other companies were hit harder. For example, shares of AMD and Nvidia, the leaders in PC components, fell about 60 percent over the same period.
While consumer demand fell across industries as the cost of living continues to rise, the PC market suffered the most. According to Gartner, PC shipments fell 19.5% in the third quarter of 2022, and the overall market declined 17.3%.
Most recently, on Oct. 7, Microsoft stock fell 4.5% after AMD tentatively announced a steep drop in PC sales for the September quarter. AMD projected revenue of $5.6 billion versus analysts' expectations of $6.7 billion as customer chip sales fell 53% for the quarter. AMD's steep drop in revenue led Microsoft investors to question the Windows company's PC business.
Microsoft's PC business is in the personal computing segment, which accounted for 30% of the company's revenue in fiscal 2022, which ended June 30. While Microsoft's leading role in the PC market has investors worried about 2022, the company's diversified revenue suggests it will weather the market downturn better than other companies.
In fiscal 2022, Microsoft's most successful segments will be the productivity and business process segment (which includes Office and LinkedIn) and the smart cloud (Azure revenue). The former segment accounted for 31.9% of Microsoft's 2022 revenues and grew 18% year over year, while the latter segment accounted for 37.9% of revenues and grew 25%.
Even the company's PC segment is not a complete black cloud for the entire business. In addition to Windows and PC revenue, this includes revenue from Microsoft's Xbox consoles and services, which grew 16% for the year. The company is perhaps best known for its influential role in the PC market, but its business has expanded over the years to include much more lucrative markets.
As of Q2 2022, the cloud market alone was worth $206.5 billion, with Microsoft's Azure having the second-largest market share at 21%. According to Grand View Research, the market will grow at a rate of 15.7% from 2022 to 2030. Moreover, Microsoft's segment growth of 25% from 2021 proves its lucrative prospects in this industry.
In addition, Microsoft's projected free cash flow as of June 30 was $65.2 billion, matching Alphabet's result with a rounding error, but behind Apple's $107.6 billion. Windows is likely to face some decline next year as recession fears intensify. However, its diversity of business lines and free cash flow suggests that the company is strong enough to overcome this.
Microsoft's 29% decline in its stock price in 2022 makes it an absolute bargain, given its long-term prospects. Given the company's significant market share in promising industries and the availability of funds that will allow it to weather a sustained market downturn, investing in Microsoft is a win-win.
As long as the price is below 250.00, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 238.41
- Take Profit 1: 228.00
- Take Profit 2: 219.00
Alternative scenario:
If the level of 250.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 250.00
- Take Profit 1: 266.00
- Take Profit 2: 275.00
