Microsoft (MSFT +2.11%) is one of just a few businesses to ever cross the $2 trillion market capitalization level. It has been in a leading market share position for decades and powers a large portion of tech spending for both consumers and enterprises. My point is that Microsoft is no diamond in the rough.
Yet there are important parts of the business that much of Wall Street doesn't fully appreciate. Let's take a look at a few less obvious factors that make this stock such a compelling choice as a long-term holding.
Boot up diversity
You'll get access to a diverse range of sales growth niches when you buy shares of other tech giants like Amazon or Apple. But Microsoft is unique in this regard.
Owning the stock gets you exposure to emerging growth areas like AI and the metaverse but is attached to more established niches, including cybersecurity and cloud services. Microsoft isn't too focused either on the consumer or the enterprise side, either, with major sales streams coming from both areas.
NASDAQ: MSFT
Key Data Points
This diversity helped keep overall sales rising in late 2022, even as parts of the business shrank. Of course, a recession would likely pull all of its segments down. But owning Microsoft stock carries less risk of a huge revenue downfall than you'd find in many of its tech peers.
Stick around for the cash
Microsoft's scale allows it to invest aggressively in areas that CEO Satya Nadella and his team see as critical growth avenues ahead. But smart investors know there's almost always plenty of cash left over after the software giant makes those key outlays.
The company sent nearly $11 billion to its shareholders in the three-month period that ended in late December. About half of those returns came from Microsoft's dividend, which recently was hiked by 10%. The rest was in the stock buyback spending that's slowly pushing up per-share earnings.
MSFT EPS Diluted (TTM) data by YCharts.
The outlook is bright for these returns to steadily rise over the years to come. That's because Microsoft is a highly efficient business, with a gross profit margin approaching a blazing 70% of sales. Sure, the company will have to trim costs during any downturn that might develop over the next few quarters. But Microsoft will likely be sending much more cash to its shareholders in five years than it is right now.
The stock is attractive
Microsoft's valuation has declined significantly since late 2021, when markets started heading lower. You can own shares for less than 9 times annual sales right now compared to roughly 14 times sales at the peak.
Bears will argue that there's still more room to fall. Apple is valued at 6 times revenue, for example, and Amazon is trading at less than 2 times its last 12 months of revenue. All of these tech giants might become even cheaper as consumer spending slows further.
That risk trade-off seems reasonable with Microsoft, though, given the growth potential ahead once the current volatility passes. And you can collect a modest dividend while you wait for the next rebound in the expansion cycle of attractive industries like video games and IT spending. It would be a mistake to ignore those positives simply because of a cyclical downturn impacting the tech world.
