After getting caught up in the tech stock slump that has battered the sector so far in 2022, Microsoft (NASDAQ:MSFT) stock is rallying.
Until the closing bell on Tuesday, MSFT stock was down 14% since the start of the year. However, Microsoft reported its Q2 fiscal 2022 results Tuesday evening. After an earnings and revenue beat plus better-than-expected guidance, shares began to rally. In the two days post-earnings, MSFT shares popped by nearly 4%.
That’s not a spectacular number, but for a tech stock in 2022? Not bad at all.
Does this short rally mean that Microsoft shares have momentum? After five years of strong growth, MFST stock had been sputtering but the company’s strength was on full display on Tuesday. Multiple strategies are paying off for the company — led by strong growth in its cloud business — and they have plenty of room for growth.
In addition, the company has shown with its $68.7 billion deal to buy Activision Blizzard (NASDAQ:ATVI) that it’s not afraid to spend big to keep the momentum going. Here’s why I think MSFT is a strong contender for inclusion in your portfolio.
Microsoft Delivers a Q2 Earnings Beat
On Jan. 24, Microsoft reported its Q2 fiscal 2022 results. Wall Street had been looking for revenue of $50.88 billion and adjusted earnings of $2.31 per share. Instead, Microsoft reported revenue of $51.7 billion. That was up 20% year-over-year and headed up by Microsoft Cloud revenue that increased 32% YoY to hit $22.1 billion. Earnings-per-share of $2.48 also handily beat projections.
Microsoft doesn’t see its business slowing any time soon. The company’s CFO noted that demand remains strong and said MSFT is expecting revenue for Q3 in the $48.5 billion to $49.3 billion range. Once again, that topped Wall Street expectations, which were for revenue of $48.23 billion.
While MSFT stock initially dropped sharply the day after the earnings report, it quickly rallied to finish the day on a positive note.
Microsoft’s Huge Cloud Business Has Plenty of Room to Grow
Microsoft’s cloud business is becoming a driving growth engine for the company. The good news is it has plenty of potential growth runway remaining — although the landscape is competitive.
The global cloud computing market has been projected to grow from $445.3 billion in 2021 to $947.3 billion in 2026. That’s a CAGR of 16.3%. In addition, Microsoft’s share of the global cloud computing market has been growing. While market leader AWS has been holding steady at 32% of the market since the end of 2017, in that same time Microsoft Azure has increased its share from 13.7% to 21%.
Gaming Growth, the Metaverse Awaits
Adding to the Microsoft growth story is the company’s Xbox gaming division. The Xbox Series X/S has been handily outsold by the PlayStation 5 so far in this generation. However Microsoft continues to dominate in online and subscription gaming with services like Xbox Live and Xbox Game Pass.
In addition, the company continues to grow its stable of game development studios. In 2021 it finalized the $7.5 billion acquisition of ZeniMax Media, which brought Bethesda Softworks under the Xbox umbrella. This month’s announcement that Microsoft is buying Activision Blizzard in a $68.7 billion deal would make Microsoft the world’s third-largest gaming company.
These purchases allow Microsoft to add popular games like Bethesda’s Fallout series to Xbox Game Pass. It will likely do the same with ATVI titles like Call of Duty. Doing so increases subscription revenue. Microsoft could also choose to make new titles Xbox-exclusives. Both strategies help to boost the case for gamers to buy an Xbox instead of a PlayStation. MSFT is playing the long game here.
Microsoft also sees the purchase of Activision Blizzard as a key component to the metaverse. ATVI games like World of Warcraft have huge communities of online players who interact in what is arguably a metaverse platform. Gaming and the metaverse are both long-term growth opportunities for Microsoft and for MSFT stock.
Don’t Forget Hardware
Let’s not overlook Microsoft’s Surface hardware. MSFT’s slowest growing division, Surface hardware still managed 8% YoY revenue growth for the quarter.
Microsoft has been dabbling with using its own custom-designed chips in several Surface devices. Doing so offers big advantages in feature optimization — something that Apple (NASDAQ:AAPL) has done to great effect with its M1 series MacBooks. Microsoft is rumored to be looking at ditching Intel (NASDAQ:INTC) in favor of custom chips for its next generation of Surface devices.
Doing so would give Surface laptops a distinct advantage over other Windows PCs. Combined with a global PC market that has shifted into growth mode over the past two years, such a move could let Microsoft boost that Surface revenue performance.
Bottom Line on MSFT Stock
MSFT stock currently earns a “B” grade in Portfolio Grader. It’s a pretty solid pick for investors who are focused on long-term growth stocks — as the company’s latest earnings showed. Among the analysts polled by the Wall Street Journal, the optimism for MSFT is near-universal. Three of 44 analysts current have MSFT stock rated as a “hold” versus 35 “buy” and six “overweight.” Their average 12-month price target is $369.58, offering nearly 25% upside.
If you already have Microsoft shares in your portfolio, hold onto them. If you are looking to add MSFT stock, there’s no time like the present.
On the date of publication, Louis Navellier had a long position in MSFT. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article. InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
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