Nasdaq MSFT MicroSoft

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"Tech stocks" is not as accurate a descriptor for a company as it used to be because it can be hard to find a company these days that doesn't employ technology in some way to carry out its business. Airplanes, for example, are roughly 50-ton to 100-ton flying hunks of technology,

On April 5, the U.S. Federal Reserve announced a rapid reduction in its massive balance sheet. This caused the stock market rally to halt, and Treasury yields jumped instead. This move also caused mega-cap stocks like Microsoft Corporation (MSFT) to fall. Despite this, we are bullish on the stock.

Microsoft is one of the most reputed tech companies in the world that comes with a solid track record of delivering attractive returns. Over time the company has undergone a strong and long-term uptrend and has served as an anchor stock for many tech investors.

Though recently, it too had suffered from the tech bear market condition to some extent, its sufferings were less extreme compared to that of many other tech stocks. It seems that the market has immense confidence in its resilient business model, relatively speaking.

It is a good time to take a look into it, especially now when the Fed has made it clear that it will hike interest rates and reduce its balance sheet. 

Microsoft Corporation is a United-States-based multinational technology corporation that deals in computer software, consumer electronics, personal computers, and many other related services.

The company has been actively moving its customers' legacy workloads and applications to the cloud and has exposure to multiple software themes in the fields of cybersecurity, data analytics, CRM, ERP, gaming, and many more. Moreover, Microsoft has a tremendous hold over the SaaS Space and also benefits largely from the strength of its Azure IaaS.

Microsoft's well-diversified business model operates across multiple profitable segments. However, with the advent of the pandemic, its Azure segment got a huge boost. Considering the present industry scenario, it seems like this sector will be a major contributor to the company's future growth.

As per research by Gartner, the proportion of new workloads deployed in a cloud-native environment will go up from 30% in 2021 to 95% in 2025, thereby providing vast growth opportunities to the companies like Microsoft. Therefore, as the stock is down now, this may be a perfect buying opportunity. 

Brent Bracelin, a Wall Street Analyst from Piper Sandler, also has a similar opinion on the Microsoft stock and gave it a buy rating about three months back. He has recommended that growth stock seekers should add Microsoft to their portfolios because of the favorable risk-reward opportunity it has been providing to its investors, especially after the market's pullback.

Multiple Growth Avenues

One of the primary reasons behind Microsoft's stability is its diversity of operations. This is because multiple sources of revenue with continuous cash flows ensure that the company can not only survive but also grow and expand non-stop. 

Microsoft operates three solidly profitable segments to support its robust growth. As there has been a revival in the use of PCs, especially after the pandemic's outbreak, its legacy Personal Computing segment has been witnessing respectable growth.

Its Windows 11 provides a great user experience to PC users, and because of the multitasking and productivity advantages its new Snap Layouts provide, more people love it these days.   

The company's momentum across cloud computing and cybersecurity sectors has also been promising. Azure has garnered strong momentum in the hybrid and multi-cloud areas, and the SaaS advantages provided by it have also given it tremendous leverage opportunities for integrating newer productivity tools and automation software in-house.

All these integrations have driven the company's operating margins largely. Further, its cybersecurity solution is highly valued. There are rumors of a partnership with Google in this space these days.

Strong Financials

Microsoft has got some of the strongest financials in the tech sector. In its most recent results declared back in January, the company's revenues increased by 20% year-over-year to $51.7 million in the last quarter of 2021, and its operating income also increased by 24% to $22.2 billion during the same time.

Net income came in at $18.8 billion, which has also grown by 21% compared to the last year. Revenue across LinkedIn, Dynamics products, and the Cloud Services segment have shown high growth potential.

Wall Street's Take

Turning to Wall Street, MSFT stock comes in as a Strong Buy based on 27 unanimous Buy ratings assigned in the past three months.

The average Microsoft price target is $374.88, implying an upside of 32.5%. Analyst price targets range from a low of $320 per share to a high of $425 per share.

Metaverse Play

The metaverse is the next best thing and is predicted to grow into a $678.8 billion industry by 2030 from the $38.85 billion industry it was back in 2021. Microsoft is all set to venture into this world of virtual reality.

The company intends to create an enterprise Metaverse containing the virtual representation of all Microsoft tools, thereby creating a real-time collaboration with the virtual world. Microsoft Mesh is all set to be launched and will be coming with a set of pre-built immersive spaces for holding meetings and for socializing. It will also let its users create avatars and interact with each other.

Microsoft intends to acquire Activision Blizzard (ATVI), the gaming giant, to help it build its own world in the metaverse. Right now, the deal is under intense scrutiny by regulators.

Conclusion

Microsoft is one of the best stocks to hold at this moment to shield one's portfolio against market fluctuations. The stock has such strength that it could easily pass the bear market pull without losing much of its valuation, in our opinion.

Moreover, the company is poised to grow in the future, considering the plethora of opportunities that are coming for it. It also pays a $0.62-per-share dividend. Besides, the several steady streams of its revenues have always ensured the company with the availability of respectable cash flows.  

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Even the stock market’s most prominent names are suffering in 2022’s unhospitable environment. Take Microsoft (MSFT) for example, whose shares show a year-to-date uncharacteristic 14% decline.  

That said, to be able to withstand the shaky macro climate, Morgan Stanley’s Keith Weiss thinks few are as well-positioned as Microsoft to do so.

“Microsoft continues to represent a rare combination of strong secular positioning and reasonable profitability-based valuation within the software space,” explained the 5-star analyst. “Leadership across key growth categories and CIO's indications of stable Enterprise IT spending into CY22 should help offset impacts of a volatile macro environment.”

Weiss notes that even in today’s uncertain surroundings, the software spending environment as a whole “remains strong,” and following on from the banking firm’s recent CIO survey, the analyst’s takeaway is that Microsoft still boasts “strong positioning across key growth and defensible spending categories.”

Yes, there are headwinds. Weiss counts global macro uncertainties, a modestly higher FX impact than provided with the guidance and Windows OEM “growth normalization” as ones impacting performance, yet also stresses that the “combined impact should be limited.”

Not to mention, the company has one significant tailwind blowing at its back. As workloads continue the migration to the cloud, these headwinds should be “offset by IT budget share gains.”

And although the bears think the 40%+ Azure growth is “unsustainable,” and are concerned growth will swiftly “decelerate” year-over-year into the 30% range, heading into 3QFY22 earnings, Weiss thinks the growth momentum remains “strong,” despite not anticipating further acceleration.

For the quarter, the analyst expects a slight deceleration to cc revenue growth, calling for a 45% uptick, although the channel checks indicate “continued cloud strength,” and as such, Weiss thinks there could be “some upside.”

Summing up, Weiss continues to see an “attractive path going forward, supported by CIOs’ view that Microsoft should gain the most IT wallet shares in the next 12 months, as well as, over the next three years as their companies transition to the Cloud.”

All in all, Weiss rates MSFT shares an Overweight (i.e. Buy) and backs it up with a $372 price target. If everything goes as planned, MSFT will soar 29% over the next 12 months. (To watch Weiss’s track record, click here)

Overall, Microsoft is that rare beast, with plenty of analyst coverage where all are in agreement; all 27 recent reviews are positive, naturally culminating in a Strong Buy consensus rating. At $374.88, the average price target sits just above Weiss’s and is projected to generate returns of 33% over the coming months. (See Microsoft stock forecast on TipRanks)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

Shares of streaming entertainment kingpin Netflix (NFLX) have been plunging considerably lower of late, now down around 50% from their peak levels at ~$700 per share. With shares sagging around the $350 per-share mark, questions linger as to whether the former entertainment behemoth is worth a second look on the dip.

Though Netflix is still a leader that'll be tough to top in streaming, the competitive forces have grown so rapidly. With the pandemic tailwind now gone, Netflix may face its toughest competitive fight since its days clashing with Blockbuster and its mail-in DVDs.

Netflix rose out on top at that time as a pioneer in the Streaming Video-on-Demand (SVoD) space. As people become spread across a wide range of video subscription services, though, the staying power of Netflix will be propelled to the forefront.

Indeed, the average consumer likely has video subscriptions that go far beyond Netflix. Arguably, the SVoD space is becoming less convenient, with so many options out there. Further, big tech titans have pretty much thrown in their video services alongside a wide range of other services, most notably music and photo storage. For now, I am neutral on the stock.

Netflix's Price Increases Could Weigh on Growth

Although Netflix has demonstrated considerable stickiness and pricing power up until now, it remains to be seen what happens to the entertainment behemoth once a recession happens and consumers are forced to tighten.

Video streaming services are quite discretionary in nature. With Netflix hiking prices amid rampant inflation, it's unclear how consumers will react this time around, especially given the price of necessities, rent, and food has been off-the-charts.

Though we're not in a recession yet, consumers certainly feel the pinch. The inverted yield curve, which could point to a recession in 2023 or 2024, also does not bode well for discretionary firms.

If anything, Netflix's recent price hikes could work against it, given rivals will be fighting for a share of your average consumer's streaming budget, which could fall if we were to head into a Fed-induced economic downturn.

Indeed, questions linger as to whether Netflix's last quarter of slowed subscriber growth is just the start of a sustained trend lower. Though Netflix has a ton of great content, I think the company would have been better off absorbing the blow of inflation. The last thing investors want to see is a further deterioration in subscriber growth in the face of great economic uncertainty.

Netflix's Rivals are Getting Stronger

To offset slowing growth trends, Netflix needs to improve the value proposition for its users, as its big-tech bundling peers like Apple (AAPL) have been. Arguably, the Apple One bundle is hard to stack up against, with gaming, video, cloud storage, fitness, and news services at a reduced price.

Apple's streaming service, Apple TV+, may come up short versus the likes of a behemoth like Netflix. Still, Apple TV+ has come a long way since its days as a freebie that many Apple users passed up on. Apple's Oscar-award-winning CODA itself is gaining considerable attention, as too is sci-fi thriller Severance, a high-rated series that looks to "rhyme" with that of Netflix's Black Mirror.

Indeed, the Ben Stiller-directed series Severance and other intriguing additions (think Friday Night Baseball) to the Apple TV+ platform are starting to tilt the odds in favor of the platform over the likes of a Netflix, especially for some of the more price-conscious consumers out there who may be reluctant to accept the fact that prices are headed higher.

Netflix Needs to Go Beyond Video to Keep its Growth Strong

What can Netflix do to improve the value of its own service? Obviously, a higher quantity and quality of video content will be needed to keep growth alive in a more competitive landscape.

However, the firm may need to go beyond just video. It's not a mystery that Netflix has video-game ambitions, but it's way behind in the game (forgive the pun, please), with only a few mobile offerings aimed at casual gamers.

I'd argue that Netflix should be looking to take a page out of Microsoft's (MSFT) playbook by making a big acquisition to bolster its footing in gaming. Otherwise, it could be hard for consumers to stand by as rivals drive down the price of video services.

It's not just gaming where Netflix can thrive; live sports is another arena (again, forgive the pun) in which the firm can better compete against the likes of an Apple TV+ or even a sports-focused service like DAZN.

With Apple in the running to win the rights to stream NFL Sunday Ticket, it seems as though Netflix may need to hustle to differentiate itself in the discretionary entertainment scene, which is growing to encompass more than just movies and series.

Wall Street's Take

Turning to Wall Street, NFLX stock comes in as a Moderate Buy. Out of 35analyst ratings, there are 18 Buy recommendations, 15 Hold recommendations, and two Sell recommendations.

The average Netflix price forecast is $508.57, implying upside potential of 45.5%. Analyst price targets range from a low of $342.00 per share to a high of $700.00 per share.

The Bottom Line on Netflix Stock

Netflix is down, but it's not out. Still, with an increased risk of a recession, recent price hikes and a crackdown on account-sharing may do the firm more harm than good amid its growth slowdown.

As the company explores new growth verticals (sports or gaming), the stock can have the means to bounce higher again. Until then, the road could prove rather bumpy for the former market darling facing competitive pressure from all sides.

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