Technology stocks have been gyrating lately as investors assess the effects of rising inflation, anticipated rate increases from the Federal Reserve and a possible slowdown in consumer spending. Yet Microsoft Corp.’s latest earnings underscore why the company still looks like a safe bet over the long term.
The software giant Tuesday reported another strong quarter, with revenue of $51.7 billion in the three months ended in December, up 20% compared with figures in the period a year earlier and higher than the $50.87 billion median estimate of analysts surveyed by Bloomberg. Earnings for the company’s fiscal second quarter also came in above estimates.
Microsoft’s shares initially fell nearly 5% after the results were announced, a possible sign that anything short of a blockbuster quarter makes investors nervous as they await the Fed’s pronouncement about interest rates on Wednesday. Tech stocks are especially sensitive to interest-rate policy because higher rates lower the value of expected future earnings, especially for growth stocks. But the shares swung back into positive territory after the company provided an optimistic outlook for its Azure cloud-computing unit during its earnings call.
Even if the general economy falters, Microsoft’s main businesses should prove to be more resilient than most.
Consider Microsoft’s Azure cloud service, which is the No. 2 player in the sector behind Amazon Web Services. A recent Morgan Stanley survey of chief information officers revealed cloud-computing projects were still the top priority inside corporate IT budgets. According to the technology buyers, only about one-quarter of their applications are running on the cloud today, a figure they estimate will rise to 44% by 2024. That means any near-term turbulence is unlikely to change the multiyear spending plans to shift internal systems to the cloud. Unsurprisingly, Azure posted 46% growth in the latest quarter.
Microsoft also might be more insulated from the threat of inflation. Because it has dominant positions in office-productivity software, operating systems and server applications, the technology giant has more room to raise prices without the risk of losing too many customers. The company has already announced substantial price increases, starting in March, for its office and communications products, ranging from an incremental $1 to $4 per monthly user depending on the plan. Wedbush Securities estimates the move will add more than $5 billion in revenue for Microsoft in 2022.
And then there is the other big question on investors’ minds: Microsoft’s acquisition strategy. Last week, the company announced plans to buy Activision Blizzard Inc. for $69 billion in what would be the biggest deal in Microsoft’s history. It follows a flurry of other large acquisitions — including a $20 billion purchase agreement for voice-recognition and AI specialist Nuance Communications Inc. last year and the $7.5 billion buyout of video game publisher ZeniMax Media. While some questioned the logic of paying such a steep price for the video game maker, Microsoft is positioned better most companies to take risks in M&A. If the deals turn out to be mistakes, they are essentially rounding errors relative to Microsoft’s multitrillion-dollar market value and annual net profit, which is projected to be $70 billion this fiscal year.
Microsoft is trading at roughly 30 times analysts’ earnings estimates for the next four quarters, compared with 28 times for Apple Inc., 23 times for Alphabet Inc. and 22 times for Facebook parent Meta Platforms Inc., respectively. While Microsoft is generally more expensive than its peers — which entails higher risk on any shortfall — it is reasonable given the consistent and recurring nature of its revenue from its corporate customer base.
In other words, outside a severe recession, Microsoft’s money-making machine should keep chugging along.
Bloomberg
