Though nobody can say with certainty whether we'll be entering a recession in 2023, enough signs are pointing that way to cause both people and businesses to begin preparing accordingly. For investors, this could mean rough times ahead for many of their investments.
Big tech has had its fair share of humble pie in the past 12 months, and with a looming recession in 2023, it might get worse before it gets better. However, of all big tech companies, none may be more recession-resistant than Microsoft (MSFT 0.60%).
Microsoft is dividing and conquering
One thing differentiating Microsoft from many competitors is just how diverse its revenue streams are. Its ecosystem of products and services all do a good job of pulling in their fair share of the revenue load.
Having this many income streams isn't exclusive to Microsoft, but the difference is how spread out the revenue is among them. Of the $52.75 billion Microsoft made in the second quarter of its fiscal 2023, no segment accounted for more than 38%. For perspective, just the iPhone itself accounts for more than half of Apple's revenue, and Google advertising accounts for over 80% of Alphabet's revenue.
Having diverse revenue streams ensures the business isn't too affected if one segment is hit hard by economic conditions. For example, spending on gaming may slow during a recession, but luckily, that represents less than 10% of Microsoft's revenue.
It's the type of customers that benefit Microsoft
Aside from the many different ways Microsoft makes money, what makes it more recession-resistant than its competitors is just who its customers are: other companies. There are countless companies in the world that rely on Microsoft products and services to run their business.
NASDAQ: MSFT
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Plenty of companies use Windows PCs for daily work. Industries like finance would go into a frenzy without Excel. Cloud services have increasingly become a necessity, especially for companies operating online. It's hard to imagine job recruiting and searching without LinkedIn. The list goes on of ways Microsoft is intertwined with many companies' daily operations.
If a recession does occur, there's a good chance that consumers will slow down their spending, especially on consumer discretionary products and services. Microsoft's corporate clients, however, likely won't be going anywhere or drastically decreasing how much they spend with the company.
It's easy for a consumer to forgo the latest iPhone when money is tight and the economy is less than ideal; it's much harder for a company to go from using cloud storage back to in-house storage.
Services allow for a higher margin
Since a lot of Microsoft's revenue comes from its services and software, it's able to operate with a higher gross profit margin than many other big tech companies that rely on hardware sales. Once most software is made, you can ship as much of it as you like without incurring too much extra cost (aside from maintenance and updates). It costs to make every single phone, tablet, or laptop sold.
Data by YCharts
This higher margin gives Microsoft more flexibility to adjust its prices without hurting its profit too much. That's extra important during times when the company may need to lower certain prices (or keep them the same while costs go up) to accommodate economic conditions.
A priority for the company is keeping customers in its ecosystem and the recurring revenue coming in.
