Microsoft (MSFT +0.60%) stock hasn't had the best 2022. Share performance trailed the wider market through mid-September, thanks partly to a general distaste for tech and growth stocks and partly because of a growth hangover in key areas like PC and video game software. Surging demand in earlier phases of the pandemic is giving way to weaker growth in 2022.
But Microsoft will be back. The business has several promising growth avenues ahead, including cloud services and an eventual rebound in areas like gaming. There are even better reasons for smart investors to like this stock today, too. Let's take a closer look at three things investors should know about this stock.
1. When adversity arises, it's good to be the king
When the economy tightens, most of the earnings still being generated tend to go to industry leaders, and Microsoft is taking full advantage of this competitive fact. The company has a premium position in several major niches, from cloud computing to productivity software. Smart investors see evidence of this success in metrics like operating profit margin.
MSFT Operating Margin (TTM) data by YCharts.
Operating income jumped 14% last quarter, for example, and was up 21% to $83.4 billion in the full 2022 fiscal year. "No company is better positioned than Microsoft," CEO Satya Nadella said back in July, "to help organizations deliver on their digital imperative."
2. Microsoft has the cash to weather the storm
Microsoft is also one of the most cash-rich businesses around. Not only has annual cash flow been on a steadily upward trend, but it's racing toward $90 billion. Cash generation doesn't require too much investment in capital-intensive data centers, either, which helps Microsoft stand out against big tech peers like Meta Platforms.
That cash has many productive uses, including reinvestment into the business through major acquisitions like the Activision Blizzard purchase. Microsoft is also sending billions of dollars back to investors in the form of dividends and stock buybacks. Shareholders love the extra stability provided by these direct returns when markets head lower.
NASDAQ: MSFT
Key Data Points
3. Microsoft has time on its side
Despite all the positive metrics, Microsoft stock is valued at its lowest price-to-sales ratio since pre-pandemic days. Shares have declined thanks to general concerns about slowing economic growth, but also concrete signs of a pullback in niches like video games and productivity software.
But Microsoft is highly likely to be posting much higher earnings in these segments and in the cloud services division a few years from now. In the meantime, investors can choose to reinvest its regular dividend payments while they hold the stock through the upcoming volatility.
Sure, you might avoid further downswings in the stock by waiting for the global economic growth trends to look better. But timing a rebound like that is difficult, and you're more likely to miss some of the biggest rally days in the process. It's a smarter move to continue building a portfolio full of stellar businesses like this one, even during challenging sales environments like we're experiencing now.
There's no guarantee that Microsoft stock will deliver positive returns over the next year or so. But its dominant position in categories like digital productivity, video gaming, and cloud services promise to support solid long-term returns for its shareholders.
