Many investors are running from the market this year. This is perfectly understandable; investing in a down market is maddening. But intelligent long-term investors know better than to try to time the bottom. Multiple reputable studies show that those who continue to invest during tough times post much larger profits over time.
That doesn't mean we should blindly throw money at any stock. While all companies deal with challenges, some are in much better situations than others, as is the case of Microsoft (MSFT -0.32%), Amazon (AMZN 0.23%), and Carnival (CCL 0.13%).
Microsoft's stock is down, but business is way up
Microsoft stock has total returns over the last five years of over 270% compared to just 69% for the S&P 500. However, the stock has fallen nearly 25% in 2022 which is more than the broader market. The stock may be down, but business is booming.
Microsoft posted another revenue record in the third quarter of 2022, reaching $49.4 billion on the back of massive 46% growth in Azure and other cloud services. The intelligent cloud accounts for $54.3 billion or 37% of Microsoft's sales this fiscal year. Microsoft Azure is a strong second in market share behind AWS (more on AWS later!).
The cloud industry is still ramping up, so there is plenty of room to expand. Microsoft is also getting more profitable. The operating margin is 43% so far this fiscal year, up from 42% in fiscal 2021 and 37% in fiscal 2020.
The dividend has been paid since 2007 and increased annually since 2010. The yield is a modest 1%, but this provides investors a small bonus while waiting for the market to turn. Investors are anxiously awaiting the fourth quarter and fiscal 2022 earnings coming July 26th. Another stellar quarter could turn the tide for the stock.
Amazon has an ace up its sleeve
It looked like the pandemic would be a boon for Amazon early on. Retail orders skyrocketed for the digital sales giant while people were stuck at home. The tide turned when logistical headaches, a tight labor market, and increased materials costs added billions in expenses to the bottom line.
The company must also contend with nosediving consumer sentiment and a potential recession leading to weakness in consumer spending. The company's segments that encompass its retail business posted a combined net operating loss in Q1 2022, which could worsen if the economy falters further.
Sounds terrible, right? Don't despair; Amazon Web Services (AWS) is a brilliant silver lining.
While the rest of the business deals with significant challenges, cloud service provider AWS is single-handedly carrying the operating profit load, as shown below.
Amazon should be able to weather the 2022 storm deftly with AWS at the helm. Even though the retail headwinds are daunting, they are only temporary. The stock is down 32% this year. So any good news, like a surprise earnings beat, could ignite a massive rally.
Carnival is not the bargain it appears to be
Microsoft and Amazon should make it through the current market quite well, a few headaches aside. Unfortunately, the same cannot be said of Carnival. We all know that the pandemic was the perfect storm for cruise providers. Now, the looming recession makes it a dreaded one-two punch.
Carnival took on massive debt obligations since the pandemic by selling junk bonds, with some now being refinanced at interest rates over 10%. The company's debt soared 170% to over $30 billion since early 2020. Debt payments will weigh down the company for many years and stifle growth. To make matters worse, Carnival significantly increased the share count.
The stock price is down more than 80% since COVID-19 took hold, yet the enterprise value is only off by 16%, as shown below. Enterprise value is a metric that accounts for debt and increases in share count.
What does this mean for would-be investors? It means buyer beware. The stock's apparent enormous discount fizzles once debt and shares outstanding are considered.
This has been a fascinating and arduous year for us as investors, but the data is clear. Those who stay invested perform much better over time. With this in mind, stalwarts Amazon and Microsoft will likely continue their market-beating ways once headwinds lessen. On the other hand, Carnival is in dire straights, and investors should consider steering clear.