MSFT

3 Things Smart Investors Know About Microsoft Stock

It's no secret on Wall Street that Microsoft's (NASDAQ: MSFT) business is decelerating. The software giant's stock has declined since early 2022 as sales growth hit a wall. Big parts of its business, including the PC and video game segments, are shrinking. The outlook isn't bright for enterprise tech spending in 2023, either.

There's more to Microsoft than those headline challenges, though. Let's look at three less celebrated aspects of this business that point to solid investor returns over the long term.

1. Microsoft has options

You can get exposure to attractive industries like cybersecurity with an investment in Palo Alto Networks. A company like Electronic Arts will give you a stake in the video game industry. And Amazon stock comes with an excellent market position in the booming cloud services niche.

Or you could simply buy Microsoft shares.

The company has an unusually deep portfolio that spans these appealing sectors as well as several others. Sure, some of these niches will have downturns, as is happening right now with the PC software world. That division is shrinking at a 30% rate today, down to pre-pandemic levels. But Microsoft delivers a more diversified exposure to tech growth trends than you could get with many of its peers.

2. Cash flow is destiny

The volatility of the last few years has made it harder to quantify the value of many growth stocks. Many tech companies are giving up some of the huge sales gains they posted in earlier phases of the pandemic. And huge swings in currency exchange rates have pressured earnings, but likely in only a temporary way.

Two key metrics suggest you don't have to worry about Microsoft announcing a surprising profit slump. The company is hugely profitable even after the slowdown that started hurting earnings in (calendar year) 2022.

MSFT Cash from Operations (TTM) Chart

MSFT Cash from Operations (TTM) data by YCharts

Microsoft generated $20.4 billion of operating income in the fiscal 2023 Q2 period (ended Dec. 31, 2022), down just 8% from the prior year. And cash flow is still strong, with operating cash at $11.2 billion compared to $14.5 billion a year earlier.

3. The waiting game

It seems likely that (calendar year) 2023 will be a soft growth year for most tech giants, and the weakness could worsen or spill into 2024. Microsoft's business wouldn't be immune to a recession, or to the downward pull of elevated interest rates.

The stock returns will be buffered by a few factors that aren't present for many of its tech peers. Microsoft pays a dividend, for example, which recently was hiked by 10%. And it is sitting on a large amount of cash, with no need to rely on expensive debt to fund the business. Microsoft's global selling footprint should also smooth out volatility from demand slumps in a few markets and niches.

These strengths don't make the stock recession-proof. But they do provide Microsoft the flexibility to keep investing in high-return projects like artificial intelligence and virtual reality so that its long-term growth outlook isn't threatened by a few weak quarters.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Demitri Kalogeropoulos has positions in Amazon.com. The Motley Fool has positions in and recommends Amazon.com, Microsoft, and Palo Alto Networks. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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