After the recent selloff of tech stocks, Microsoft (NASDAQ:MSFT) has given up all of its post-earnings gains. Given the impressive growth numbers that Microsoft reported, there are plenty of reasons to be buying MSFT stock on the dip.
Microsoft is one of only a handful of tech stocks that offer the stability of a blue chip business and long-term boosts from a number of growth catalysts. Here are four reasons to buy Microsoft stock.
Cloud Services
In the fiscal second quarter, Microsoft reported Intelligent Cloud revenue growth of 23%. Once again, the revenue growth of the company’s cloud business, Azure, raised Microsoft’s overall revenue growth rate, which was 17%.
But all revenue is not created equal. Azure’s revenue is the good kind of revenue. Not only does Microsoft’s cloud sales have higher margins than its overall business, but the unit’s margins are expanding over time. As cloud revenue accounts for more and more of Microsoft’s overall revenue each quarter, it raises Microsoft’s overall profitability.
Bank of America analyst Brad Sills says the high number of Azure enterprise deals worth more than $10 million is particularly encouraging.
“This validates our view that Azure is increasingly trusted by large enterprises for more mission critical workloads,” Sills says.
Microsoft Office
Microsoft Office has been around for decades, but the company has found a way to keep the business’ growth going. In recent years, that phenomenon has been driven by adapting Office to a new, subscription-based, cloud-centric software model called Office 365. Sills estimates that the number of Office 365 subscriptions rose 15% year-over-year last quarter, while its average sales price was up 5%.
CFRA analyst John Freeman says Microsoft’s transition to Office 365 has been extremely successful.
“Office, ~22% of [total] revenue, [is] benefiting from a cloud shift tailwind kicking in now that Office 365 cloud subscriptions are 2x+ license/support revenue,” Freeman says. CFRA is projecting Office 365 will help Microsoft more than double its 2019 EPS by 2023.
Gaming
Microsoft has been a major player in the video game business since the first Xbox was released back in 2001. In the past 20 years, the gaming business has evolved tremendously, but Microsoft has shifted its strategies accordingly.
Microsoft’s holiday-season launches of the Xbox Series X and Series S were wildly successful. But the gaming world is increasingly shifting away from consoles and physical discs to PCs and online gaming.
Microsoft’s Xbox Game Pass subscription service now has more than 18 million subscribers. The service grew tremendously during the 2020 pandemic, as gamers around the world were stuck at home with nothing to do. In fact, Microsoft reported 3 million new subscribers in its most recent reported quarter alone. Xbox’s content and services revenue was up 40% year-over-year in the quarter.
Since 2014, Microsoft has acquired six gaming studios. It also made the decision to close down its struggling streaming platform, Mixer, rather than throwing good money after bad. Meanwhile, “Halo Infinite” is one of dozens of games that will be launching exclusively on Xbox consoles in 2021.
Social media is another business that boomed during the pandemic. Stocks like Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR) both skyrocketed last year as a result. However, LinkedIn is a unique social media asset, given its focus on professional profiles and content.
Since acquiring the platform in 2016, Microsoft has unlocked value from LinkedIn’s users and its data. The platform has become a business-to-business marketing hub, and LinkedIn’s talent solutions (recruiting) business is now a major revenue source. Of course, Microsoft is also taking strides to integrate and market its own products, including Microsoft Dynamics 365 and Office 365, into LinkedIn.
Microsoft has an excellent opportunity to upsell its LinkedIn users. And given LinkedIn’s professional slant, its users can afford to spend. In fact, LinkedIn generates more than double the average revenue per user of both Twitter and Snap (NYSE:SNAP).
How to Play MSFT Stock
Microsoft stock trades at 34.7 times the company’s trailing earnings and 31.75 times its forward earnings. That’s certainly not expensive compared to other high-growth tech stocks. However, it is on the high end of Microsoft’s historical valuation range.
Now may not be the best time to buy MSFT stock for a quick trade. However, long-term investors who buy any dips can sleep well at night.
Any major technology growth theme you can think of, Microsoft is exposed to in some form. If you’re looking for the next under-the-radar tech startup and potential ten-bagger stock to buy to impress your friends, Microsoft is not it. But if you’re looking for a cash cow and a blue-chip tech growth stock with a long track record of success and outperformance, Microsoft is a great investment.
On the date of publication, Wayne Duggan did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. He is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.
