Microsoft (MSFT 1.44%) isn't posting the same type of blockbuster growth metrics that investors celebrated in 2021. The software giant's latest earnings report showed weakening sales in a few key niches. Profits fell, year over year.
But that decline is no threat to Microsoft's long-term outlook, which is bright, thanks to a multiyear shift toward cloud services, hybrid work, and digital entertainment. The company maintains huge competitive advantages here, along with killer financial assets, that make it an attractive holding for investors seeking a balance between growth and direct cash returns.
1. Microsoft is diverse
The fiscal Q1 period was rocky, but the performance showed off why investors love the company's diversity. Microsoft grew sales at just a 16% rate after accounting for currency-exchange rate shifts. That expansion pace is down from about 20% in early 2022.
But its cloud enterprise service segment posted strong growth, as did the search and LinkedIn businesses. These gains offset declines in the PC software market and video games.
Management stressed the bigger-picture growth that sent sales to over $50 billion this quarter, compared to $37.2 billion just two years ago. "In a world facing increasing headwinds," CEO Satya Nadella said, "digital technology is the ultimate tailwind."
2. The business generates tons of cash
Financial headlines immediately following the Q2 announcement focused on Microsoft's declining Q1 earnings. That slump was powered by the appreciating U.S. dollar, along with slightly lower profitability in the Azure business.
If you look closer, you'll see signs of continuing profit-margin strength. Microsoft generated $35 billion of gross profit in the period, compared to $31 billion a year ago. Operating income rose to $21.5 billion, or 43% of sales, compared to $20.5 billion, or 44.6% of sales a year ago.
MSFT Cash from Operations (TTM) data by YCharts.
Cash flow is a great predictor of long-term earnings, and Microsoft shines in that department. The company is sitting on $108 billion of cash today, up from $105 billion a year ago. It generated $23 billion of operating cash flow in Q1, and free cash flow was a blistering $16.9 billion, which was unchanged, compared to a year ago, after adjusting for a one-time tax payment.
3. Microsoft pays its shareholders
Microsoft may not be the first company you think of when looking for dividends, but it's showering investors with cash right now. Total direct shareholder returns were $9.7 billion in Q1, or nearly $3 billion per month. This total was split almost evenly between stock buybacks and a dividend that today yields about 1%.
It's a testament to the financial strength of the business that Microsoft can send so much cash to shareholders while still investing heavily in its data centers, research and development, and the huge acquisition of Activision Blizzard. There aren't many companies on the market that can make anything approaching that level of investment into future growth avenues including artificial intelligence, the metaverse, and bigger data centers.
Some of these growth initiatives won't pan out, of course. And slowing demand might spread to its enterprise-services segment if tech budgets become strained. But Microsoft has the resources to endure a slump like that without sacrificing its prime positioning in several growth markets.
Smart investors know that these factors make it likely that the business will continue expanding its reach over the next decade, delivering impressive returns along the way.
