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Just a year ago, multinational technology company Microsoft (
NASDAQ: MSFT
) touched its all-time high of $344. Wall Street is making the most of the stock that is now $100 cheaper than those highs. Last week, Microsoft jumped to the
number one spot in the list of top 10 holdings among hedge funds, according to Goldman Sachs strategist Ben Snider. Given the attractive long-term, risk-reward potential, I believe the current price levels offer a great entry point for investors.
In fact, most other hedge funds are following in the footsteps of Goldman. According to TipRanks' Hedge Fund Trading Activity tool, MSFT stock has a
very positive signal from hedge fund managers, who added 33.7 million shares during the last quarter.
Now, let’s take a deeper look at Microsoft to ascertain if the time is right to embrace the stock.
Go Long on Microsoft’s Azure
Microsoft’s cloud computing platform Azure is expected to gain from strength to strength. It is expected to be the main driver of revenues in the coming years. For Q3, the company reported impressive growth at Azure, with revenues jumping 35% to $20.33 billion.
Microsoft is focused on building Azure as the world’s leading infrastructure cloud. It has already established more than 60 data center regions with an aim to offer super-fast access to cloud services. This is impressive and is also higher than its peer group.
In addition, with Microsoft’s Azure Arc, Azure will be available anytime, anywhere across multi-cloud environments. Azure’s other extended offerings include Azure for Operators with 5G, Azure IoT, Azure Digital Twins, and Microsoft Mesh.
Potential Acquisition of Activision Blizzard
Most probably, Microsoft will be able to successfully complete the months-long, pending acquisition of Activision Blizzard (
NASDAQ: ATVI
). The deal continues to be under the radar of antitrust regulators.
Although gaming is not the core business of Microsoft, it's keen on acquiring video games maker Activision Blizzard. This is because Microsoft's gaming business is slowly gaining traction and now accounts for more than 7% of total revenues.
The addition of ATVI will significantly boost Microsoft’s foothold in the fast-growing video gaming industry. Further, the mega $69 billion deal is expected to magnificently bolster its reach and add a huge base of new customers to Microsoft. Likewise, the wider user base will add to long-term value creation for shareholders.
On the downside, regulatory scrutiny has recently increased for Microsoft. Further, there is no certainty that the
Activision Blizzard acquisition will come through as it still waits for approval in several countries.
Robust Results Despite a Weak Macro Environment
Despite a weaker macro picture and currency headwinds, MSFT reported upbeat results for Q1 of Fiscal Year 2023.
EPS of 2.35 beat by $0.04 while
revenues grew 16% on a constant currency basis. Driving the revenues was a 31% growth (constant currency) in Microsoft Cloud revenues, with Azure and other cloud services registering an impressive growth of 42% (constant currency). What’s more alluring are the margins. Microsoft Cloud's gross margin increased by 200 bps to 73% during the quarter.
Importantly, the company reported robust booking levels and expects to post double-digit growth in revenues and operating income in Fiscal Year 2023. However, in lieu of the macro uncertainty, the company provided muted Q2 guidance and also lowered the revenue outlook for Fiscal Year 2023.
Compelling Valuations
Microsoft stock has
lost almost 30% of its market capitalization. In terms of valuation, MSFT has mostly traded at a premium to its peers, which is justified given its strong competitive positioning. Currently, it is trading at a
P/E ratio of 27.5x compared to the peer group average of 19x.
On the positive side, however, MSFT’s current valuation reflects a discount from its five-year average of 32. These are attractive discount levels and present a great buying opportunity given the strong growth potential for the company.
Is Microsoft a Buy, Sell or Hold?
The Wall Street community is clearly optimistic about the stock. Overall, Microsoft stock commands a Strong Buy consensus rating based on 26 Buys and three Holds. Microsoft’s average price target of $295.38 implies 17.22% upside potential from current levels.
Closing Thoughts: Consider Buying Microsoft Stock
The gloomy macroeconomic picture has pulled down MSFT stock along with the overall stock market. However, analysts remain confident in its upward trajectory based on sturdy demand and growth as well as long-term margin expansion potential. I believe the long-term growth thesis remains intact for Microsoft. Likewise, I will add a position to MSFT stock in order to take advantage of the stock market's weakness in the coming days.
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Disclosure
A decade ago, Microsoft (NASDAQ: MSFT) was reeling. After dominating the personal computer (PC) market with its ubiquitous Windows operating software, the tech giant was slow to react to the smartphone megatrend.
The WisdomTree U.S. LargeCap Dividend ETF (DLN) was launched on 06/16/2006, and is a smart beta exchange traded fund designed to offer broad exposure to the Style Box - Large Cap Value category of the market.
The iShares Russell 1000 ETF (IWB) was launched on 05/15/2000, and is a passively managed exchange traded fund designed to offer broad exposure to the Large Cap Blend segment of the US equity market.
Software stocks are on sale in 2022. Valuations slumped across the board following spiking stock prices in 2021. That previous rally was built on the assumption that demand for software services would continue soaring as it did in earlier phases of the pandemic.
The tech industry has been battered and bruised in 2022, with the Nasdaq-100 Technology Sector index plummeting 35% year to date and many companies suffering much steeper declines. The stock market sell-off has primarily stemmed from rises in inflation, leading to decreased consu
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