The technology-heavy Nasdaq Composite index currently finds itself in correction territory. A stock market correction occurs when the market falls 10% or more from its all-time highs.
Should investors buy the dip? There is a chance the recent pullback will turn into something worse, such as a prolonged bear market. However, most 10% corrections resolve themselves relatively quickly, making them great times to pick up high-quality companies for the long haul.
That means for those looking to add to their long-term portfolios, high-quality stocks in the "Magnificent Seven" group, which has pulled back along with the market, might be great pickups today. Of these seven all-star companies, one ultra-safe name looks like the best of the bunch at this opportune moment.
Image source: Getty Images.
Be greedy when others are fearful
Over the past 10 years, the Nasdaq has corrected six times, good for about once every 1.67 years. So, the good news is that a correction is a regular, maybe even healthy, part of markets.
On the other hand, sometimes corrections turn into a full-fledged bear market, which is a correction of more than 20% and usually lasts much longer than mere corrections.
It remains to be seen whether the current pullback is a prelude to something worse. Investors will likely not know until April 2, when the Trump administration's reciprocal tariffs on Mexico and Canada are supposed to go into full effect. Even if they do, however, it remains to be seen whether they will cause a full-blown bear market.
Given the highly uncertain impact of tariffs, investors looking to add to their stock portfolios at this moment should stick with high-quality, relatively "safe" stocks that have, nonetheless, experienced pullbacks but could also weather a full-blown recession if it comes to pass. That's why the following Magnificent Seven stock looks so attractive right now.
NASDAQ: MSFT
Key Data Points
Is Microsoft ready to "awaken?"
Microsoft (MSFT +1.40%) is the second-largest company in the world today and a staple of many technology portfolios, but that doesn't mean the company can't outperform going forward.
Microsoft is one of just a few companies vying for artificial intelligence (AI) supremacy. Given the massive investment required to compete in the race for artificial general intelligence (AGI), it's not out of the question to think the very largest companies could become even more powerful 10 years from now. After all, people have been wondering whether the law of large numbers would catch up with the Mag-7 stocks for a while. Yet, these incredibly innovative companies have defied skeptics and managed to innovate their way to outsized profit growth over the past decade.
Moreover, if the economy were to fall out of bed, Microsoft has $71.6 billion in cash on its balance sheet against just $45 billion in debt. Moreover, in just the first half of its fiscal year (ended in December), Microsoft generated $26 billion in free cash flow, underpinned by a collection of high-margin, mostly recession-resistant subscription businesses.
In fact, Microsoft is one of only two companies with a AAA credit rating -- a rating that exceeds even that of the U.S. government!
Catalyst No. 1: A performance reversion to the mean?
Microsoft has outperformed the market by a significant margin since Satya Nadella took over as CEO in 2014, but its performance over the past couple of years has actually lagged some of its peers. In fact, the stock is actually down 8.2% over the past year -- the only negative performer of all the Mag-7 names.
MSFT 1 Year Total Returns (Daily) data by YCharts.
But that underperformance doesn't appear to be due to anything wrong with Microsoft's business. Last quarter, Microsoft grew revenue a solid 12%, and operating profit grew 17% as margins expanded.
So, the recent underperformance may merely be due to irregular bursts of gains and consolidation periods with any stock. Microsoft stock now trades at 31.5 times trailing earnings, toward the lower end of its range over the past five years:
MSFT PE Ratio data by YCharts. PE Ratio = price-to-earnings ratio.
With a valuation having reset lower, the stock could soon enter a new period of outperformance.
Catalyst No. 2: Microsoft just raised prices
Some have wondered about the financial payoff from the recent AI buildout. On that note, Microsoft's revenue and earnings seem set to get a boost this year due to a recent price increase -- a big one, in fact. In January, Microsoft announced a massive 43% price hike to its Microsoft 365 consumer subscription, which will now cost $9.99 per month or $99.99 annually, up from $6.99 and $69.99 annually.
That price increase is to pay for all the AI-powered CoPilot features Microsoft has infused into its 365 software (formerly called Office) in recent years. While the price hike may seem excessive, it's actually the first price increase on the 365 consumer product in 12 years.
Now, investors should temper their enthusiasm over this one increase a bit, as 365 consumer accounted for only about 3% of Microsoft's revenue. So, the bump in revenue and profits may be somewhat incremental from this alone.
However, commercial Microsoft 365 products account for a much larger 31% of total revenue. And while Microsoft has increased prices for the commercial product more recently, its last price hike was only 10% to 20% across the range of commercial 365 products back in 2022.
ChatGPT didn't come out until the last month of 2022, so Microsoft hasn't really increased commercial 365 product prices in the AI era yet. Therefore, if the smaller test of price increases on the consumer 365 product goes well, more price increases for commercial 365 subscriptions could be on the way. That could make a big difference in Microsoft's results.
Catalyst No. 3: An opportunity to cut costs on AI
Finally, starting this year, Microsoft may mitigate a key concern investors have about the escalating costs of AI. To date, Microsoft has been a particularly big spender on AI chips relative to its rivals. Last year, technology consulting firm Omdia estimated that Microsoft bought 485,000 Nvidia (NVDA +0.16%) Hopper GPUs in 2024 -- far and away the largest purchase of any other Nvidia customer.
That's more than double the second-largest purchaser, Meta Platforms, which bought 224,000 Hopper chips, and 2.5 times the number of GPUs bought by Amazon (AMZN +0.97%) -- even though Amazon has an even larger cloud computing business than Microsoft.
Not only did Microsoft buy more GPUs than anyone else, but it's also a huge renter of GPUs from newer "neoclouds," such as CoreWeave, which is about to go public in an initial public offering (IPO). According to CoreWeave's S-1 filing, Microsoft accounted for 62% of CoreWeave's $1.92 billion in revenue last year.
The reason for Microsoft's outsized spend is that it has not yet scaled up its custom AI chip (XPU) business, whereas its big cloud rivals have invested in custom XPU programs for years now. Nvidia GPUs sell for huge margins, as evidenced by the company's skyrocketing gross and operating margins since the AI revolution took off two years ago.
Thus, Amazon and others with robust custom chip programs are routing as many workloads to custom chips as possible and away from Nvidia GPUs. That's why Amazon's purchases of Nvidia GPUs were so much lower than Microsoft's.
But that just means Microsoft has that much more opportunity to save on AI infrastructure when it scales up its own XPU business. And that should happen soon. Microsoft just introduced its Maia AI chips in late 2023 and has still only deployed its first-generation Maia XPUs thus far. So, Microsoft's in-house chip program hasn't had much time to mature and ramp to big enough volumes to compete with Amazon and others just yet.
However, CEO Satya Nadella said in an interview in late 2024 that Microsoft won't be "chip constrained" by the middle of this year like it was last year. That could mean Microsoft will ramp up its next-gen in-house XPU program sometime in mid-2025, enabling potentially massive cost savings and a further boost to margins.
It all adds up
Recent underperformance, a relatively lower valuation, upcoming price increases, and potential AI cost savings should all combine to enable Microsoft to thrive in 2025. While the broader macroeconomic picture is uncertain today, the AAA-rated Microsoft remains a top name to pick up right now for investors with a long-term investing mindset.
