What happened
Shares of tech giant Microsoft (MSFT 0.43%) fell hard today, down some 4.5% as of 12:30 p.m. ET.
Microsoft is considered somewhat defensive by tech standards, so it was rare to see the stock down so much in a day. However, there were several tech leaders down by much more, as peer Advanced Micro Devices (AMD 3.46%) pre-announced plummeting PC sales for the September quarter, which signals soft sales for Microsoft's PC-related business as well.
In addition, the broader tech sector was down, as bond yields rose following a strong jobs report.
NASDAQ: MSFT
Key Data Points
So what
Last night, AMD pre-announced revenue for its September quarter, which came in far below expectations. AMD now expects revenue to come in at $5.6 billion, far below the $6.7 billion in revenue it guided for on its August earnings call.
The main culprit here is AMD's "client" division, which means computers and PCs. Client chip sales are absolutely falling off a cliff, and are expected to be down 53% quarter over quarter and down 40% year over year. It appears as though the pandemic pulled forward a lot of PC demand. Now that inflation is high and economic uncertainty looms, PC sales have ground to a halt. End sales of PCs are likely down less than these figures, but PC makers are also likely reducing their inventory as well ahead of new chip architectures coming out later this year from AMD and rivals.
That doesn't bode well for Microsoft's PC-related businesses, which entail licensing its Windows operating system to others, along with sales of its own Surface PCs and tablets.
Yet before investors panic, this could be an overreaction. Microsoft's Windows and PC businesses are grouped within its "More Personal Computing" segment, which also includes things like Xbox games and Bing search engine ad sales. Last fiscal year, that division made up just 30% of Microsoft sales, and was already the slowest-growing of Microsoft's segments. So it's not insignificant, but not as important as the cloud and other enterprise software services.
One silver lining is that AMD's data center chip sales are still projected to grow strongly. In the pre-announcement, that division is projected to be up 8% quarter over quarter and 45% year over year.
However, all of technology is struggling right now, especially companies with large international sales like Microsoft. The relative outperformance of the U.S. economy and Federal Reserve rate hikes are causing long-term bond yields to rise and the dollar to strengthen. This has the effect of raising the discount rate on growth stocks, while also lowering international revenue to U.S. companies like Microsoft.
There was more not-so-great news on that front today, as September employment figures came in strong, with the unemployment rate falling from 3.7% to 3.5%. That suggests a tight labor market, which means the Federal Reserve will likely continue hiking interest rates aggressively.
Now what
Microsoft investors really aren't in too much danger here from a long-term perspective, as its results have been nothing short of fantastic. While it won't be immune to a global slowdown, its Azure cloud and enterprise software divisions actually help businesses automate and fight against inflationary forces. Judging by AMD's cloud results, those divisions should be OK. Meanwhile, Microsoft sports a AAA rating from ratings agencies -- even higher than that of the U.S. government.
After a rough nine months of the year, Microsoft trades at just 23 times this year's earnings estimates, giving investors an earnings yield over 4%, still above the 10-year Treasury yield, despite the recent Treasury yield rally.
And unlike government bonds, those earnings should grow for the next decade at least, as cloud computing and tech-forward software applications should continue their adoption. Microsoft remains a solid, defensive buy, despite today's decline-by-association with less-strong PC companies.
