Many investors are understandably wary of stocks in the technology sector these days. The U.S. stock market has experienced a rough 2022 so far due to macroeconomic factors, such as inflation, and tech stocks have been hit particularly hard.
But investors shouldn't overlook Microsoft (MSFT -2.45%). The tech titan's stock price has dropped along with the broader market, hovering around $270 at the time of this writing after hitting a 52-week high of $349.67 last November.
The share price decline creates a potential buy opportunity, but a lower price alone doesn't justify an investment. After all, this month, Microsoft reduced its fiscal fourth-quarter revenue guidance due to a stronger U.S. dollar. That's why it's worth digging into Microsoft's business to understand why the company is a buy for investors with an eye toward the long term.
Image source: Getty Images.
Microsoft's cloud strength
A key reason to invest in Microsoft is the company's shift to cloud computing as its core offering. This doesn't mean Microsoft is ignoring its famed Windows operating system and related Office software. Windows maintains market dominance, being used by nearly 74% of the world's desktop computers.
What's changed is that Microsoft's ubiquitous Office software is now sold through a software-as-a-service (SaaS) model. Customers pay a subscription fee to access the software from Microsoft's cloud, giving the company a predictable, recurring revenue stream. This is just one of Microsoft's many cloud offerings.
Other cloud products include Dynamics, a customer relationship management SaaS platform, as well as Azure, Microsoft's solution for IT infrastructure and data storage in the cloud, which is second only to Amazon's AWS, the cloud computing market leader.
The focus on cloud-based solutions drove 18% year-over-year revenue growth in Microsoft's fiscal third quarter, ended March 31. Revenue hit $49.4 billion, the latest quarter in a multiyear trend of steadily rising revenue, even amid the coronavirus pandemic.
Data by YCharts.
If we look at just Microsoft's cloud offerings, business is booming. Over the last year, the company's cloud revenue consistently increased every quarter while maintaining strong year-over-year growth.
| Quarter | Microsoft Cloud Revenue | YOY Growth |
|---|---|---|
| FY22 Q3 | $23.4 billion | 32% |
| FY22 Q2 | $22.1 billion | 32% |
| FY22 Q1 | $20.7 billion | 36% |
| FY21 Q4 | $19.5 billion | 36% |
| FY21 Q3 | $17.7 billion | 33% |
Data source: Microsoft. YOY = year-over-year. FY = fiscal year.
Microsoft's cloud business is poised to continue its stellar performance. The cloud computing industry is forecast to grow from $706.6 billion last year to $1.3 trillion by 2025, serving as a tailwind for Microsoft.
Beyond the cloud
Microsoft's revenue growth doesn't end with its cloud offerings. Other parts of the company's operations have flourished throughout the current fiscal year.
Microsoft's digital search and news advertising division experienced a year-over-year revenue increase of 29% to $8.7 billion over the first three quarters of the fiscal year. Its professional networking site, LinkedIn, saw year-over-year revenue grow 38% for the first nine months of fiscal 2022 to $10.1 billion.
Meanwhile, Microsoft's gaming division saw year-over-year revenue grow 10% through the first nine months of fiscal 2022 to $12.8 billion. This is impressive given a tough comparison to fiscal year 2021, when the division saw 42% year-over-year revenue growth through the first three quarters, thanks to consumers spending more time playing video games due to pandemic-related lockdowns, and its Xbox platform launching a new console version.
A resilient business
Like many global companies these days, Microsoft faces multiple macroeconomic headwinds, such as the stronger U.S. dollar, which affects foreign currency exchange rates. This is significant since nearly half of Microsoft's revenue comes from outside the U.S.
However, even in this environment, Microsoft said in early June that it expects fiscal fourth-quarter revenue to reach at least $51.9 billion, a drop from its prior guidance of $52.4 billion due to the stronger dollar, but still a significant increase over last year's $46.2 billion.
Microsoft also pays a dividend, which it began in 2003. The company has raised its dividend steadily for more than a decade and the dividend is secure thanks to Microsoft's strong free cash flow, which rose 17% year over year in the third quarter to $20 billion while the company paid $4.6 billion in dividends. The stock is yielding less than 1% at its current price.
Microsoft's free cash flow is just one indicator of the company's strong financials. At the end of its fiscal third quarter, the company had a whopping $104.7 billion in cash, cash equivalents, and short-term investments. Total assets stood at $344.6 billion compared to total liabilities of $181.7 billion.
With several lines of business achieving year-over-year growth, healthy financials, and a dividend to boot, there's a lot to like about Microsoft. Once the current macroeconomic conditions weighing on tech stocks improve, Microsoft shares are poised to bounce back. For the patient investor, this well-run tech company is a good long-term investment.
