Is Microsoft Stock a Buy Now?

Microsoft (MSFT 1.52%) posted its latest quarterly report on Jan. 24. For the second quarter of fiscal 2023, which ended on Dec. 31, 2022, the tech-giant's revenue rose 2% year over year to $52.7 billion and beat analyst estimates by $450 million. Its adjusted earnings declined 6% to $2.32 per share, but still cleared Wall Street's expectations by $0.01.

Those growth rates were anemic, but Microsoft had previously warned investors that it would experience slower growth in fiscal 2023 as it grappled with macro and currency headwinds. Its decision to lay off about 10,000 employees, or 5% of its workforce, by the end of March also tempered the market's expectations ahead of its second-quarter report.

Microsoft stock closed at an all-time high of $339.89 in Nov. 2021 but now trades nearly 30% lower, as investors focus on its near-term challenges. Does that pullback represent a good buying opportunity?

Image source: Microsoft.

Here comes the cyclical slowdown

Microsoft splits its business into three units: productivity and business processes (32% of its second-quarter revenue), intelligent cloud (41%), and more personal computing (27%). The growth of all three segments decelerated over the past year.

Data source: Microsoft. Chart by author. YOY = year over year.

The productivity and business processes segment -- which generates most of the company's revenue from Office, Dynamics, and LinkedIn -- struggled with slower enterprise spending and tough currency headwinds. On a constant-currency basis, the segment's revenue rose 13% year over year, compared to its 15% growth on the same basis in the previous quarter.

The intelligent cloud segment -- which houses its cloud infrastructure platform Azure and other server-oriented products -- was also hit by slower enterprise spending and a strong dollar. On a constant-currency basis, its 24% growth represented a slowdown from its 26% growth in the first quarter.

Its closely watched "Azure and other cloud" revenue rose 38% in constant-currency terms and accelerated from its 35% growth in the first quarter -- which indicates Azure should remain the world's second-largest cloud infrastructure platform after Amazon Web Services (AWS) for the foreseeable future. But during the conference call, CFO Amy Hood warned that Azure's constant-currency growth would decelerate 4 to 5 percentage points sequentially in the third quarter as the cloud platform faced tougher macro headwinds.

In addition, the more personal computing segment -- which handles new Windows licenses, Xbox products, and Bing -- remains the weak link as sales of PCs and video games cool off in a post-pandemic market. Sales of ads will also remain sluggish until the macro situation improves. On a constant-currency basis, this segment's revenue declined 16%.

Expanding its ecosystem as its growth cools off

Microsoft's layoffs suggest it will focus on cutting costs as its growth cools off, but it continues to expand its core businesses with big acquisitions and investments. Its planned $69 billion takeover of Activision Blizzard, which remains in limbo due to regulatory challenges, would significantly expand its Xbox division, complement its prior acquisitions of Bethesda and other publishers, and add more games to its subscription-based Game Pass service.

Microsoft's multibillion-dollar investments in OpenAI, the creator of the popular AI platform ChatGPT, should also bolster Azure's artificial intelligence (AI) capabilities and turn Bing into a more formidable competitor for Alphabet's Google. It will also likely integrate OpenAI's AI algorithms into its other software services.

Therefore, Microsoft might be trimming some fat from its weaker businesses but doesn't plan to fall behind Amazon, Google, and its other megacap peers in the ongoing race to develop cutting-edge technologies.

How long will Microsoft's slowdown last?

Microsoft expects the constant-currency growth of its productivity and business, and processes and intelligent cloud segments to decelerate again on a year-over-year basis in the third quarter of fiscal 2023. It also expects its more personal computing revenue to decline year over year for the second-consecutive quarter.

Based on the midpoints of those estimates, Microsoft's total revenue should still grow 3% year over year on a reported basis in the third quarter. Analysts expect its revenue and earnings to rise 7% and 4%, respectively, for the full year. In fiscal 2024, they expect the company's revenue and earnings to grow 13% and 17%, respectively. Those estimates, which exclude a potential takeover of Activision Blizzard, suggest the macro headwinds will gradually wane.

Take those forecasts with a grain of salt. Microsoft has weathered plenty of rough cyclical downturns since its IPO in 1986. It also ended the second quarter with nearly $100 billion in cash, cash equivalents, and short-term investments -- which gives it plenty of room to make more investments, repurchase more shares, or boost its forward yield of 1.1%.

Microsoft's stock might not seem like a screaming bargain yet at 25 times forward earnings, but it's still a solid investment for long-term investors who can tune out all the near-term noise about a strong dollar and soft economy.