Microsoft (MSFT) was one of few big tech firms to give investors what they wanted this earnings season. With a solid beat and upbeat guidance, Microsoft stock was initially rewarded until the rest of the market dragged it lower again. Undoubtedly, it's hard for any non-energy stock to sustain positive momentum these days.
As the resilient big-tech titan looks to move further past the $2 trillion market cap mark again, it could provide the rest of this troubled market with a bit of relief. Microsoft isn't just an influential company; it's a leader that may prove too cheap at these levels, now down around 20% from its all-time high just north of $340 per share.
At 27.74 times trailing earnings, Microsoft may not be the cheapest of the big-tech group. Still, it's arguably one of the most undervalued, given its remarkably resilient quarter in the books.
While a recession could drag Microsoft's multiple even lower, it appears to be one of the highest quality names on the market.
Investors Quick to Forget Microsoft's Brilliant Quarter
Microsoft's Azure flexed its muscles for the third quarter, helping power the company to a magnificent top-line growth of 18% year over year. Despite the beat and management's confidence, Microsoft is not immune from the effects of a recession.
This market is so influenced by inflation and rate hikes that it's easy to forget that there are robust companies out there that can continue to thrive despite the gloomier conditions.
With rising odds of recession, there's a real possibility that Microsoft could come up short. Though I don't view management's constructive guidance as discounting the odds of a recession over the next year. The company is fully aware that the economy could take a turn for the worst. Still, its businesses are firing on all cylinders such that it may be able to weather the storm far better than its rivals.
Recently, the company announced its intent to cool on hiring across its Windows and Office groups. Many technology companies have frozen hiring or trimmed away at their workforces amid rockier economic conditions. Though Microsoft could drastically slow hiring, they did note their intention to increase wages for existing employees.
The combination of wage hikes and hiring pauses are a rather strange mix and likely a sign of the times.
Indeed, it's gotten much harder to retain talent in the age of the 'Great Resignation.' At the same time, recent hiring freezes and layoffs seem to point to the early signs of an economic downturn.
Undoubtedly, employment prospects vary based on industry. For service positions, it's tough to hire right now. In the technology sector—where most of the market-wide selling has been concentrated—firms feel the pressure to cut costs. Microsoft seems to be in the middle ground. Its stock has taken quite a hit, but not nearly as much as shares of your average high-tech innovator.
Can Microsoft Keep Performing as the Economy Fades?
Moving ahead, it's the high-growth Azure business that could continue to power strong results for Microsoft, even as the rate hikes take a bite out of economic growth. Sure, an economic slowdown could take a lot of wind out of Azure's sails. Still, it will be interesting to see if the cloud's digital transformation tailwinds can offset seemingly imminent recessionary pressures.
Further, it's still too early to conclude that the Federal Reserve will cause a hard landing for the economy as it looks to hike rates higher to put the inflation genie back in the bottle.
At this juncture, management seems cautiously optimistic. Microsoft looks to be more cautious with new roles in specific segments like Windows and Office. However, the company still looks to be going full speed with Azure.
Also, should the Activision Blizzard deal go through, I'd look for the gaming division to really heat up as Microsoft looks to add more content to its video-game library.
In addition, supply chain issues will subside with time, and more gamers may finally be able to get their hands on the latest generation of Xbox consoles. Indeed, the gaming business has catalysts that should help steady Microsoft's ship as it moves through rougher market waters.
Wall Street's Take
According to TipRanks’ analyst rating consensus, MSFT stock comes in as a Strong Buy. Out of 24 analyst ratings, there are 23 Buy recommendations, and one Hold recommendation.
The average Microsoft price target is $357.01, implying an upside of ~31%. Analyst price targets range from a low of $298.18 per share to a high of $411.00 per share. (See MSFT stock forecast on TipRanks)
The Bottom Line on Microsoft Stock
Microsoft stock has been a lone bright spot in big tech this year. As the economy grinds to a halt, I think investors currently underestimate the firm's ability to power through.
The company may be slowing hiring in certain divisions, but it's not about to pull the brakes on Azure or gaming anytime soon. Both segments could help keep afloat as economic conditions continue to deteriorate.
With its brilliant CEO Satya Nadella at the helm, the behemoth is in excellent hands as it endures yet another year of unprecedented challenges.
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