Source: PaxForex Premium Analytics Portal, Fundamental Insight
The bigger a company gets, the harder it is for it to make a market profit-at least in theory. But even in the midst of the market downturn, Microsoft showed why it is the exception to the rule, defying the detractors and far exceeding Wall Street's expectations. At the same time, however, the company sent warning signals about its future growth, causing its stock to plummet.
The tech giant posted $50.1 billion in revenues in its first fiscal quarter (ended Sept. 30), up 11% year-over-year or 16% in constant currency terms. At the same time, diluted earnings per share (EPS) was $2.35, down 13% year-over-year or 7% in constant currency. Both easily beat the consensus forecast of analysts, who had expected sales of $49.7 billion and EPS of $2.31. Unfortunately, it also marked Microsoft's lowest revenue growth rate in five years.
One of the most anticipated numbers in Microsoft's report was the performance of its smart cloud segment, with revenue of $20.3 billion, up 20 percent year over year. The segment's top figure was the Azure cloud, which grew by 35%.
Microsoft's productivity and business process segment, which features commercial Office products, posted revenue of $16.5 billion, up 9%. LinkedIn stood out, with revenue up 17% thanks to Talent Solutions, a recruiting and hiring platform. LinkedIn also saw a 24% increase in sessions, delivering record engagement.
If there was a weak link in the chain, it was the personal computer segment, which had revenue of $13.3 billion, down slightly. The weakness was due to a decline in the PC market, as fewer and fewer computers are sold with Windows pre-installed. Xbox content and services amplified the decline, down 3 percent. Consumers have been restraining their spending in recent months amid high inflation, which has negatively impacted the segment.
Microsoft also reported an increase in operating expenses, driven by a significant investment in Azure.
Perhaps most troubling to investors is the company's outlook, which came in well below expectations for its fiscal second quarter. Management forecast revenue of $52.85 billion at the midpoint of its forecast, or growth of just 2 percent year-over-year, well below analysts' consensus forecast. (Analysts were expecting revenues of $56.2 billion, or growth of about 6%.)
The most troubling aspect of the forecast concerns its flagship cloud segment, as CFO Amy Hood said: "We expect Azure revenue growth to be down about five points sequentially on a constant currency basis." This should be alarming, as it suggests that growth in the cloud division could slow to 30% in the current quarter.
In addition, Microsoft continues to experience currency difficulties because of the strong dollar, which will result in a 5% decline in revenue growth for the full fiscal year.
Back to the main investing question: Is Microsoft stock a buy? There are some factors to consider when deciding whether this stock is right for your portfolio.
One of the most important elements of Microsoft's business is sales diversification. The combination of revenue from the cloud segment and the business productivity segment usually helps offset weakness in the consumer segment and vice versa. However, as the company's recommendations show, no business can be completely immune to a downturn.
This is where Microsoft's strong financial position comes into play. The company has nearly $47 billion in net cash on its balance sheet, which should be enough for the tech giant to survive even a prolonged recession.
Another strong argument for Microsoft is the dividend. While its yield may seem minuscule at about 1 percent, the company has raised its payout every year since it resumed paying dividends in fiscal 2013. In addition, the company spends just 25 percent of its profits to fund payouts, providing investors with a reliable source of income in tough times. Microsoft is also buying back shares at an impressive pace, with the company's stock down 11% over the past decade.
Microsoft stock hasn't been beaten as badly as many of its tech peers, falling about 27% from its highs late last year. In the meantime, Microsoft stock is selling at about 26 times earnings, a small premium over the Nasdaq Composite's price-to-earnings ratio, which is currently around 25.
Like many other tech companies, Microsoft may temporarily fall victim to the current bear market, but make no mistake: Its position at the crossroads of digital transformation, cloud computing, and gaming will fuel the company's growth for years to come. Add to that a solid balance sheet, declining share counts, and solid dividends, and you could argue that Microsoft stock is worth buying-especially with any price weakness.
As long as the price is below 250.00, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 231.05
- Take Profit 1: 220.00
- Take Profit 2: 210.00
Alternative scenario:
If the level of 250.00 is broken-up, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 250.00
- Take Profit 1: 260.00
- Take Profit 2: 270.00
