For many investors, the end of 2022 couldn’t come soon enough. Each of the major market indexes suffered the most agonizing sell-off in more than a decade, but the Nasdaq Composite was by far the hardest hit. Even 14 months after its peak, the index is still down roughly 33% from its late-2021 high.
The ongoing uncertainty has sent many investors running for cover, but those who have been around the block a few times know that this is merely part of the cost of admission. The stock market remains the best way to generate game-changing wealth over time — at least for investors who can keep their wits about them. Every previous bear market has eventually given way to a bull market, and these occasional market plummets provide investors with the opportunity to buy top-notch companies with proven track records at historically low prices.
One compelling bear market opportunity is Microsoft (NASDAQ: MSFT). Like many technology companies, the macroeconomic uncertainty has punished the stock. However, those who step back and look at the big picture will realize that this is one stock investors should be buying like there’s no tomorrow.
An undeserved pummeling
The last 12 months hasn’t been an enjoyable one for Microsoft shareholders. Even as the tech giant delivered record results, its stock fell 25%, pushed lower by the macroeconomic forces driving the broader market.
Yet, a look at the results show a company that continues to execute at a high level. For fiscal 2022 (which ended June 30) Microsoft generated record results, highlighted by revenue of $198.3 billion which climbed 18% year over year and operating income of $83 billion, up 19%. Helping fuel the results was Microsoft’s cloud computing business, which surpassed $100 billion in annualized revenue for the first time.
To be clear, Microsoft faced numerous headwinds that weighed on its growth. Exchange rates lowered revenue by roughly $595 million, while production shutdowns in China and the deteriorating PC market cost another $300 million. Declining advertising spending also took a toll, to the tune of $100 million.
Yet even as the market downturn worsened, Microsoft continued to generate respectable growth. In its fiscal 2023 first quarter (ended Sept. 30), revenue climbed 11% year over year, but that only tells part of the story. If not for the impact of a strong dollar on foreign exchange rates, revenue would have grown 16% — down just slightly from last year’s pace. This shows that it’s the current economic slowdown — not any problem with Microsoft — that’s weighing on its growth.
The impact of these macroeconomic conditions were also evident in the varied performance of Microsoft’s largest business units. While the intelligent cloud segment grew 20% year over year, the more personal computing segment decreased slightly, while the productivity and business processes segment climbed 9%.
This helps illustrate an important point about Microsoft: Its strength is in the diversity of its businesses, which run the gamut from enterprise solutions to consumer products and everything in between. Even as one feels pressure, another can take up the slack.
Taken together, the evidence suggests that once the macroeconomic headwinds abate, Microsoft’s stock rebound should be swift and strong.
What will drive future growth?
Given its massive size, investors might be tempted to believe that Microsoft’s growth is over, but that ignores several important growth drivers.
Much ink has been spilled about the digital transformation. In its simplest terms, it’s the process of replacing outdated processes and creating new, more efficient ones, using digital technology. Cloud computing, the process of storing and accessing systems, data, and programs in data centers and accessing them via the internet, is one example — which offers a host of benefits to businesses.
The ongoing adoption of cloud computing will no doubt benefit Microsoft Azure, the second-largest worldwide cloud infrastructure service provider, trailing just Amazon Web Services (AWS). Azure is also growing faster than its larger rival, as its cloud computing revenue grew 35% year over year in the third quarter, outpacing the 27% growth of AWS, according to Canalys.
That isn’t Microsoft’s only opportunity for growth, and recent moves help illustrate it has other irons in the fire. The company’s pursuit of Activision Blizzard would not only give Microsoft a bigger beachhead in the gaming market but would also supercharge its cloud gaming aspirations.
Microsoft also stunned the tech world when reports emerged of a $10 billion investment in OpenAI, best known for DALL-E 2 and ChatGPT. This could take Microsoft’s artificial intelligence (AI) capabilities to the next level, with a host of ways to profit from the next-generation technology.
Let’s talk about price
Given Microsoft’s leadership in the enterprise productivity market, strong position in its consumer-facing businesses, and Top 2 cloud computing operation, its valuation is at its lowest point in years. Microsoft’s stock is trading for just 8 times next year’s sales — an extremely reasonable valuation — particularly given its history of strong growth and ongoing prospects.
The preponderance of evidence suggests that it’s the macroeconomic headwinds dragging Microsoft’s stock lower. The current climate will eventually give way to better times, and when it does, investors will wish they bought more Microsoft stock while it was on sale.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Danny Vena has positions in Activision Blizzard, Amazon.com, and Microsoft. The Motley Fool has positions in and recommends Activision Blizzard, Amazon.com, and Microsoft. The Motley Fool has a disclosure policy.