Amid the recent technology sector rout, one mega-cap tech stock has weathered the storm with shocking and impressive resilience. While its peers are all more than 15% of their recent highs, and many have dropped 30% or more, Microsoft (NASDAQ:MSFT) currently trades just 8% off its all-time highs.
That is shocking. MSFT is typically viewed as similar to the FAANG names i.e. it’s seen as a mega-cap tech stock with lots of growth opportunities. But while all of the FAANG names are essentially in bear-market territory. MSFT stock isn’t even in correction territory.
The resilience of MSFT is impressive and a testament to the strength of the company’s fundamentals. There are a few headwinds that are weighing on mega-cap tech stocks. But none of those headwinds affect MSFT. Instead, MSFT stock is still being powered by continuous tailwinds related to artificial intelligence (AI) and data which aren’t slowing all that much.
MSFT should be strong for the foreseeable future. The growth of MSFT is powered by AI and data, and it has limited exposure to increased regulation, higher tariffs, and rising interest rates. As a result, as long as AI and data continue to grow rapidly, Microsoft stock will continue to be the most resilient mega-cap tech stock in the market by a long shot.
Since AI and data will continue to quickly proliferate in the near, medium, and long terms, MSFT stock will both continue to weather the near-term volatility of the tech sector and head significantly higher in the long-run.
Prevailing Headwinds Won’t Affect MSFT
In simple terms, the headwinds which are dragging down the FAANNG names simply do not apply to Microsoft stock.
Facebook (NASDAQ:FB) is nearly 40% off its all-time highs because of regulation concerns, the slowing growth of its digital ad business, and its increased spending on security which is compressing its margins. Amazon (NASDAQ:AMZN) is more than 20% off its all-time highs because of its exposure to tariffs, valuation concerns, and slowing retail growth. Apple (NASDAQ:AAPL) is 25% off its all-time highs because of slowing iPhone demand and plenty of exposure to China and tariffs. Netflix (NASDAQ:NFLX) is 35% below its all-time highs because of valuation concerns and the pressure that rising interest rates will place on its debt-loaded balance sheet.
Nvidia (NASDAQ:NVDA) is down 50% from its peak due to its exposure to tariffs and the sudden end to the cryptocurrency mining craze. Alphabet (NASDAQ:GOOG) has dropped 20% below its all-time highs due to regulation concerns, the slowing growth of its digital ad business, and the fact that its margins are dropping because of a continued shift to mobile ads.
So there are a few headwinds which are weighing on mega-cap tech stocks. The growth of companies that are exposed to digital ads is under pressure. Rising interest rates are pressuring the stocks of companies with sky-high valuations and those with a bunch of debt. Tariffs are reducing demand for impacted products and pushing costs higher. The cryptocurrency hype has ended, and that’s creating a drag on anything related to crypto. And increased regulation of big tech is as big a threat today as it’s ever been.
MSFT isn’t plagued by any of these headwinds.
The company has some, but not much, exposure to digital ads through its Bing search engine, so lower prices for digital ads aren’t catastrophic for Microsoft stock. Meanwhile, MSFT trades at a fairly average forward multiple of 24, and the company has far more cash than debt on its balance sheet. Since the company’s valuation and debt levels are reasonable, it shouldn’t be hurt much by rising interest rates.
Also, tariffs weren’t mentioned once on Microsoft’s recent earnings conference call, and that’s because the company hardly has any exposure to potential tariffs at the moment. MSFT also doesn’t have any crypto exposure, nor has it been under the regulation microscope like Facebook and Alphabet.
Overall, the headwinds which are dragging down big tech stocks simply don’t apply to MSFT stock. That is why Microsoft stock has been impressively resilient during this tech stock rout.
Microsoft’s Growth Remains Robust
Whereas the growth of most other mega-cap tech companies is slowing, Microsoft’s growth is actually accelerating.
This was the big takeaway from Microsoft’s strong first-quarter earnings report. Its rapidly growing cloud business remains on fire, and despite the current macroeconomic headwinds, Microsoft’s overall growth trajectory continues to improve. At the beginning of fiscal 2016, Microsoft’s revenue was declining. By the beginning of fiscal 2017, its revenues were growing 2%-3%. At the start of fiscal 2018, its revenue growth was in the 10%-plus range. Now, at the start of fiscal 2019, its revenue growth is nearing 20%.
The acceleration of Microsoft’s revenue growth has been very impressive, and it is entirely due to Microsoft’s cloud revolution. This revolution is still in its early innings. It is estimated that only 20% of enterprise workloads have migrated to the cloud thus far. Inevitably, that number will reach 100% in the long-run, implying that Microsoft’s biggest growth driver has plenty of room to accelerate.
More importantly, within the cloud sector, Microsoft has become the best-in-class. In the cloud world, Amazon, Microsoft, and Alphabet are known as the “Big Three.” But the “Big Three” is increasingly becoming the Big Two as Microsoft Azure is emerging as a solid runner-up to Amazon Web Services, and Google Cloud is becoming a still-formidable but much smaller third wheel. Moreover, Azure is growing far faster than AWS (Azure is growing at a 76% clip versus 46% for AWS), so the big winner in the continuously-growing cloud space right now is Microsoft.
Because of this, Microsoft stock should benefit from solid and improving growth drivers in both the near-term and the long-term. As the cloud revolution goes global and AI and data become more important than ever, Microsoft’s growth trajectory will only improve, and MSFT stock will head higher.
The Bottom Line on MSFT
The headwinds affecting other mega-cap tech stocks don’t apply to MSFT. Meanwhile, the tailwinds keeping other tech stocks at above-average valuations do apply to MSFT stock.
As a result, Microsoft should remain resilient in the near term and become a winner in the long-term.
As of this writing, Luke Lango was long MSFT, FB, AMZN, AAPL, NFLX, NVDA, and GOOG.