Microsoft: Why current weakness is a new buying opportunity

  • Despite a 30% decline from the highs, Microsoft stock still looks a bit pricey.
  • But the company manages to overcome the slump in PC sales; the long-term outlook remains solid.
  • The size of the company limits the upside, but with a lower risk, the action MSFT is interesting.

Right now, no investor is going to get rich on Microsoft (NASDAQ:) stock – at least not quickly. With a market capitalization of $1.82 billion, the Redmond, Washington giant is simply too big and too mature to post astonishing multi-year returns.

But, especially with a 30% decline from last year’s highs, MSFT is precisely the type of stock that long-term investors need to hold to add wealth consistently. It remains one of the best – even the best – market companies. The valuation isn’t necessarily cheap, even after the sell-off, but in the context of growth potential and near-term headwinds, it’s certainly reasonable. All in all, there’s plenty to be satisfied about.

A difficult year 2023?

Wall Street’s opinions on MSFT seem to highlight a certain contradiction. The stock’s average price target is $297, indicating a 23% upside (plus 1% dividend). Still, consensus fears for earnings per share for fiscal year 2023 (ending June) favored year-over-year growth of less than 4%, a notable slowdown from the 16% rise seen over the past year. the 2022 financial year.

In other words, analysts have estimated that MSFT should afford about 31 times earnings – even if earnings may not possibly increase. (In fact, much of Microsoft’s expected growth will come from share buybacks rather than increased operating profit).

It seems strange to be so optimistic about the company ahead of such a difficult year. And, indeed, the year is likely to be difficult: Microsoft management admitted this during the first fiscal quarter conference call at the end of October.

The company simply faces a series of challenges. The strength of the site is a headwind: the rate of change shaves five percentage points off the rate of revenue growth in the last quarter and nine points off the increase in operating profit.

Microsoft helped boost personal computer sales boom due to pandemic; that tailwind is now reversing, with Windows revenue from PC sales down 15% year-over-year on . And in the enterprise market, customers are tightening their belts, which is another potential drag on overall growth.

Wall Street’s caution about FY23 earnings, at least, seems logical. For some investors, his optimism about Microsoft stock may not make as much sense.

The long-term case

But the Wall Street outlook actually makes sense – and perhaps even highlights the opportunity here. Fiscal Year 23 will be a tough year for Microsoft, especially against the backdrop of its impressive turnaround over the past decade. What is important, however, is that it will be a difficult year due to the external environment, and not due to business failures, competitive issues or other factors.

Regardless of the actual growth rate of net income this year, the company is in good shape. In cloud computing, Azure continues to trail (NASDAQ:) in the race for market share, and Microsoft appears to have distanced itself from Alphabet (NASDAQ:) (NASDAQ:) and Oracle (NYSE: ).

Windows and Office still have no competition. Even Bing seems to be taking market share, although Google still dominates the search market.

Meanwhile, the challenges of the external environment will come to an end. The dollar will stabilize. PC sales will likely return to their admittedly modest long-term growth rate. Anyone can guess how the macroeconomic environment assessed, but over time it will even out.

The fact is, the stock market – and yes, most stock analysts – is looking to the future. For Microsoft, it’s not just fiscal 2023 results, but also the outlook for fiscal 2026 and 2033.

These perspectives have not really changed. The only thing that has changed is the price. In the long run, those are two good things.

Disclosure: At the time of writing this article, Vince Martin has no position in the titles mentioned.

Leave a Comment