Robinhood's (HOOD 1.71%) customers have reputations for chasing riskier meme stocks, options, and cryptocurrencies for short-term returns. But according to Robinhood's investor index, which tracks the 100 most widely held stocks on its platform, its customers also own plenty of S&P 500 stalwarts, such as Microsoft (MSFT +1.01%) and Disney (DIS +0.14%).
Microsoft and Disney are usually considered stable long-term plays, but they still declined about 13% and 30%, respectively, over the past 12 months. Let's see why these two blue chip stocks slumped -- and whether either is worth buying right now.
Image source: Getty Images.
What happened to Microsoft?
Under Satya Nadella, who in 2014 became Microsoft's third CEO, the tech giant aggressively expanded its cloud and mobile services to reduce its dependence on its desktop software. That's why its annual revenue grew at a compound annual growth rate (CAGR) of 15% from fiscal 2017 to fiscal 2022, which ended last June, as its net income rose at a CAGR of 22%.
NASDAQ: MSFT
Key Data Points
But in the first half of fiscal 2023, Microsoft's revenue grew only 6% as its net income declined 13%. Analysts expect its revenue and earnings to grow about 2% for the full year.
That slowdown can be attributed to macro headwinds forcing companies to rein in their software spending, the weak post-pandemic PC market impacting its sales of Windows licenses and other desktop-based productivity software, and a strong dollar shaving a percentage point off its reported revenue growth in fiscal 2022. The growth of the Xbox unit, which had accelerated during the pandemic as more people stayed home, also cooled off as the lockdowns ended.
Microsoft also expects Azure, the cloud infrastructure platform driving a large portion of its growth, to experience a near-term slowdown as companies rein in their spending on cloud-based services.
Microsoft's growth probably won't accelerate again until the macro headwinds dissipate and the PC market stabilizes, so its stock still isn't a bargain at 24 times forward earnings. However, it was still sitting on $99.5 billion in cash, cash equivalents, and short-term investments at the end of the second quarter -- so it could remain a safe bear market buy.
What happened to Disney?
Disney's revenue rose at a CAGR of 8% between fiscal 2017 and 2022, which ended last October, but its net income declined at a negative CAGR of 19%. Two main challenges caused that earnings decline: the COVID-19 pandemic, which disrupted its theme park and theatrical businesses throughout fiscal 2020, and the loss-leading expansion of its streaming ecosystem, which includes Disney+, Hulu, and ESPN+.
NYSE: DIS
Key Data Points
Disney also struggled with abrupt leadership changes. Bob Iger stepped down as the House of Mouse's CEO in 2021, but he returned just a year later after his successor, Bob Chapek, failed to stabilize its business. Analysts expect Disney's revenue and earnings to rise 8% and 17%, respectively, this year as it lays off workers, cuts costs, and streamlines its spending.
That near-term outlook seems stable, but Disney still faces a lot of challenges. In the first quarter of fiscal 2023, Disney+ lost subscribers for the first time as its subscriber base shrank sequentially from 164.2 million to 161.8 million.
That slowdown is worrisome since Disney's direct-to-consumer unit is still operating at a loss and offsetting the healthier operating profits from its theme park and movie businesses. Disney could also inadvertently cannibalize its theatrical business by bringing its films to Disney+ earlier or launching them as streaming exclusives.
Disney's challenges are more existential than cyclical. It ended its latest quarter with $8.5 billion in cash and equivalents, but its free cash flow should remain negative as it aggressively expands its streaming ecosystem. In light of all those challenges, its stock doesn't seem cheap at 24 times forward earnings.
The better buy: Microsoft
Nadella's Microsoft realized it was falling behind the tech curve, but it prioritized the expansion of its cloud and mobile businesses to generate stable long-term growth again. Meanwhile, Iger's Disney ignored the existential threat of streaming services for years until they started to chip away visibly at its linear TV businesses.
As a result, Microsoft is now better prepared for the future than Disney, which is still scrambling to save its media business with massive streaming investments before it drags down its theme park and movie businesses. So when the macro headwinds wane, Microsoft will probably recover much more quickly than Disney. Since both stocks are trading at similar valuations, it makes a lot more sense to buy Microsoft than Disney right now.
