The Nasdaq-100 index hosts 100 of the largest technology companies listed on the Nasdaq stock exchange. It was pummeled in 2022, shedding 33% of its value, as surging inflation and rising interest rates pushed investors out of high-growth tech stocks and into safer alternatives.
2023 was off to a much better start; the index had jumped as much as 17% by early February, but as of this writing, it's clinging to a gain of just 9%. Aside from the economic challenges mentioned above, investors are now contending with concerns about the health of the regional banking system, with SVB Financial collapsing into receivership last Friday. It's the parent company of Silicon Valley Bank, an institution renowned for its support of the start-up and venture capital space, which is making investors even more nervous about the technology sector.
The Nasdaq-100 index was formed in 1985, and since then, it has delivered a positive annual return 78% of the time. Moreover, consecutive down years are incredibly rare; the index has only experienced that one time -- during the dot-com bust from 2000 to 2002. Excluding that period, after suffering declines in 1990, 2008, and 2018, the index surged by an average of 52% the very next year. That bodes really well for 2023.
If history does repeat itself, here's why Microsoft (MSFT -1.00%) stock might be one of the best bets for the rest of this year.
Image source: Getty Images.
Microsoft has long-term staying power
Microsoft is one of the most diversified companies in the technology industry. It started out in software with its Windows operating system and Word processing platform, the modern iterations of which are still used by billions of people worldwide. But the company now has a thriving hardware business, a cloud services segment that ranks No. 2 worldwide, and a growing presence in artificial intelligence (AI).
Consumers have struggled with high inflation and rising interest rates, which leaves them with less money to spend on big-ticket electronics. As a result, Microsoft's Surface line of laptop computers and tablet devices has struggled recently, as has its Xbox gaming ecosystem, which is experiencing sluggish sales and falling engagement. But, as I said, diversity is Microsoft's strength.
Its Azure cloud platform continued to grow at a 31% clip year over year in the recent fiscal 2023 second quarter (ended Dec. 31). While it has consistently expanded at a mid-40% pace in prior quarters, it was still the fastest-growing piece of Microsoft's business in Q2, and its key competitors like Amazon Web Services experienced similar slowdowns.
Azure provides hundreds of cloud solutions to its business customers, whether they need simple website hosting, to analyze large quantities of data, or to develop software applications. According to an estimate by Grand View Research, the cloud might grow to become a $1.5 trillion annual opportunity by 2030, and Azure is tackling that market from a position of strength.
But artificial intelligence is stealing the show
Whether you're an active technology investor or a casual observer, you've probably heard of the ChatGPT online chatbot created by OpenAI. It has the ability to answer questions in incredible detail on almost any topic, and it has led to speculation that AI could replace humans in skilled professions like journalism, programming, or even law.
Microsoft has been a supporter of OpenAI since 2019 when it invested $1 billion in the company. But earlier this year, it announced it would follow up that investment with a further, unspecified amount of money rumored to be in the vicinity of $10 billion.
Microsoft has already integrated OpenAI with Azure, so its customers have access to advanced generative AI applications to supercharge their businesses. But ChatGPT has a more consequential integration with Microsoft's Bing search engine, which has historically struggled to dent the market share of Alphabet's Google Search.
Bing accounts for just 3% of worldwide search traffic compared to Google's 93%. But Microsoft says it has seen an uptick recently with 100 million daily active users now trying out the new ChatGPT-powered Bing just one month since its launch. Microsoft says every 1 percentage point of market share it steals from Google could be worth $2 billion in revenue, so the AI stakes are running high.
Microsoft is a financial fortress
The best stocks to buy during a down market are those with strong financials, because it's more likely the company will pull through the difficult period, and less likely it'll require a capital injection that would dilute existing shareholders.
Microsoft has a whopping $99.5 billion in cash, equivalents, and short-term investments on its balance sheet, so the company's future is incredibly secure. Plus, it's a profitable enterprise, delivering $33.9 billion in net income during the first half of fiscal 2023 alone. The company is so comfortable with its financial future that it has also returned $19.4 billion to investors through share buybacks during that very same period.
Despite the company's strong footing, Microsoft stock is down 27.5% from its all-time high amid the broader tech sell-off, combined with the broad slowdown across its business led by its consumer segments. But there are some early signs headwinds like inflation are cooling off, so if history repeats for the Nasdaq-100 in 2023, the current discount in Microsoft stock might look like an absolute bargain in the long run.
