Down 25%, Is Microsoft Stock a Buy?

Investors are not so enthusiastic about Microsoft (MSFT -0.51%) stock as they were in earlier phases of the pandemic. Although the tech giant enjoys dominant market positions in hot software, cloud services and gaming niches, the stock is trailing the market in 2022 on fears of a major slowdown ahead.

With that big picture in mind, let’s look at some reasons why you might want to take advantage of falling stocks.

Things can get tough, but Microsoft is up to the task

It’s clear that Microsoft’s business is not growing at the level it was a year ago. Sales growth slowed to 12% in the most recent quarter from 21% last year. Sure, a big part of that slowdown came from changes in the exchange rate. But Microsoft is also seeing weaker demand for productivity software and video games.

Like its peers, the company is experiencing a growth hangover compared to the soaring sales of the past two years. Some enterprise customers are also cutting back on spending, which could put pressure on their cloud services platform in the coming quarters. Chief Financial Officer Amy Hood said the sales environment was “buoyant” in the fiscal fourth quarter, but Microsoft still gained market share.

The good news

That market share position is a better indicator of long-term growth than sales swings from quarter to quarter. Microsoft’s leadership in areas like digital transformation, productivity, gaming and cloud services will translate to higher annual earnings over time, even if the outlook is cloudy in the coming quarters.

And investors can look to the company’s stellar financials to boost returns in the meantime. Generated a whopping $89 billion of cash flow in the last full fiscal year (ended June), compared to $77 billion in fiscal 2021. Operating income was similarly strong, up 19% .

This financial strength means Microsoft won’t be under as much pressure as its peers to cut costs and perhaps invest less in attractive growth areas like virtual reality, the metaverse, and game development. The company can afford to remain profitable while continuing to absorb large acquisitions such as the impending purchase of Activision Blizzard (ATVI 0.16%).

Cash returns will also be ample, as illustrated by the $12.4 billion Microsoft returned to investors last quarter through share buybacks and dividends.

Looking to the future

The share price drop reflects the fact that Wall Street is focused on the next few quarters, which could be painful for the business, rather than the next few years, which are likely to bring big growth.

It makes sense to avoid some businesses in a tough sell environment, especially if they are debt-ridden or don’t have a proven business model. Software businesses with declining market share are also risky today.

But Microsoft has none of those weaknesses. It is positioned to lead in several areas that should see strong growth over the next decade. And it has the financial resources to weather an industry downturn, should one develop.

These factors make it an especially attractive stock for investors who see a balance between growth, cash returns and moderate risk. Consider adding Microsoft to your watch list as its decline in 2022 makes stocks more attractive today.

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