Investors aren't nearly as excited about Microsoft (MSFT 2.36%) stock as they were in previous phases of the pandemic. Although the tech giant enjoys dominant market positions in attractive software, cloud services, and gaming niches, shares are trailing the market in 2022 on fears of a major slowdown ahead.
With that big picture in mind, let's look at a few reasons you might want to take advantage of the stock's slump.
Things might get tough, but Microsoft is up to the task
It's clear that Microsoft's business isn't booming to the level it was a year ago. Sales growth slowed to 12% in the most recent quarter from 21% last year. Sure, a big part of that deceleration came from exchange-rate shifts. But Microsoft is also seeing weaker demand for productivity software and video games.
Like its peers, the company is seeing a growth hangover compared to soaring sales over the last two years. Some enterprise customers are slowing spending, too, which could pressure its cloud services platform over the next few quarters. Chief financial officer Amy Hood said the selling environment was "dynamic" in the fiscal fourth quarter, but that Microsoft still gained market share.
The good news
That market share position is a better indicator of long-term growth than quarter-to-quarter sales swings. Microsoft's lead in areas like digital transformation, productivity, gaming, and cloud services will translate into higher annual earnings over time, even if the outlook is cloudy over the next few quarters.
And investors can look to the company's stellar finances to bolster returns in the meantime. It generated a whopping $89 billion of cash flow in the last full fiscal year (ended in June), compared to $77 billion in fiscal 2021. Operating income was similarly strong, up 19%.
This financial strength means Microsoft won't be under as much pressure as its peers to slash costs and perhaps underinvest in attractive growth areas like virtual reality, the metaverse, and game development. The company can afford to maintain profitability while still absorbing big acquisitions like its impending purchase of Activision Blizzard (ATVI).
Cash returns will also be ample, as illustrated by the $12.4 billion that Microsoft sent back to investors last quarter through stock buybacks and dividends.
Looking ahead
The stock price slump reflects the fact that Wall Street is focused on the next few quarters, which might be painful for the business, rather than the next several years, which are likely to bring major growth.
It makes sense to avoid some companies in a tough selling environment, especially if they rely on debt or don't have a proven business model. Software businesses with declining market share are risky today, too.
But Microsoft has none of those weaknesses. It is positioned to lead in several areas that should see strong growth over the next decade. And it has the financial resources to weather an industry recession, should one develop.
These factors make it an especially attractive stock for investors seeing a balance between growth, cash returns, and moderate risk. Consider adding Microsoft to your watch list since its decline in 2022 makes shares more appealing today.
