Is Microsoft Stock a Buy Now?

Microsoft's (MSFT 0.37%) stock price dropped 8% on Wednesday, Oct. 26, after the tech giant posted its latest quarterly numbers. In the first quarter of fiscal 2023, which ended on Sept. 30, Microsoft's revenue rose 11% year over year (and grew 16% in constant currency terms) to $50.1 billion, which exceeded analysts' expectations by $410 million. Its net income declined 14% (and fell 8% in constant currency terms) to $17.6 billion, or $2.35 per share, but still cleared the consensus forecast by six cents.

Microsoft's headline numbers weren't terrible, but a closer look reveals a few glaring weaknesses which likely rattled the bulls. Should investors ignore those flaws and accumulate more shares of this tech titan?

Image source: Microsoft.

Microsoft's revenue growth is decelerating

Microsoft's top-line growth in the first quarter represented its weakest year-over-year revenue growth in five years. All three of its core business segments -- productivity and business processes (33% of its revenue), Intelligent cloud (40%), and more personal computing (27%) -- lost their momentum over the past year.

Data source: Microsoft. YOY = Year over year.

The productivity and business processes segment -- which includes Office, Dynamics, and LinkedIn -- mainly struggled with slower enterprise spending and tough currency headwinds. On a constant currency basis, the segment's revenue actually rose 15%. The intelligent cloud segment, which handles Azure and its other server-based products, also faced similar challenges. Its revenue rose 26% in constant currency terms.

The more personal computing segment faced a much tougher slowdown as weak sales of PCs and video games in a nearly post-pandemic market curbed the market's appetite for new Windows licenses and Xbox products, respectively. On a constant currency basis, the segment's revenue grew a mere 3% year over year.

None of those headwinds will dissipate anytime soon. The dollar will likely continue to strengthen as interest rates keep rising, while lengthy PC upgrade cycles will cap the near-term growth of its Windows business. The Xbox business could also continue to face a drought of new hit games and supply chain constraints.

Microsoft expects its total revenue to rise just 1% to 3% year over year in the second quarter. In constant currency terms, it expects the year-over-year growth of its productivity and business processes and intelligent cloud segments to decelerate from the first quarter, and for its more personal computing segment to post a double-digit decline in revenue.

Its cloud business is losing its momentum

Microsoft's total cloud revenue rose 24% year over year (and 31% in constant currency terms) to $25.7 billion, or more than half of its top line, in the first quarter. That growth was mainly driven by its cloud platform Azure, its Office 365 productivity services, and its Dynamics 365 customer relationship management (CRM) platform. However, all three of those core cloud businesses have gradually lost momentum over the past year:

Data source: Microsoft.

Azure's slowdown is troubling, because it still trails Amazon (AMZN -1.64%) Web Services (AWS) in the cloud infrastructure race. In constant currency terms, Azure's revenue rose 42% year over year in the first quarter, which was a percentage point lower than its own expectations. CFO Amy Hood blamed that miss on the "continued moderation in Azure consumption growth" and a "growing mix of larger long-term Azure contracts which are more unpredictable in their timing."

Microsoft expects Azure's revenue to only rise about 37% year over year on a constant currency basis in the second quarter. That deceleration isn't disastrous, but it will coincide with its other currency, PC, and gaming-related headwinds.

Microsoft's long-term outlook is still stable

Microsoft faces near-term headwinds, but it still expects its revenue and operating income to grow by double-digit percentages on a constant currency basis for the full year as its operating margin stays roughly flat. Analysts expect its reported revenue and earnings to grow 9% and 6%, respectively, this year. Those growth rates are steady, but the stock still isn't a screaming bargain at 24 times forward earnings. Its paltry forward dividend yield of 1.1% also won't attract any serious income investors.

Microsoft's stock will likely head higher over the long term, but its valuation could limit its near-term gains. Investors can nibble on Microsoft's stock at these levels, since it's still a stable blue chip stalwart, but they should realize its stock probably won't perk up again until the PC and cloud markets stabilize and the dollar finally weakens.