Tech giant Microsoft (MASDAQ:MSFT) has been on a rocky ride over the past year, along with many other large tech companies. Today, the stock trades down considerably from its 52-week high of $316, despite remaining at the top of its industry.
The dip that Microsoft is currently experiencing could be an opportunity to buy the stock at bargain prices. One of the most compelling arguments in favor of Microsoft is its cloud services business, Azure.
Microsoft Azure occupies a dominant place within the cloud computing ecosystem and currently has a user base of nearly 1 billion. Even more importantly, 85 percent of Fortune 500 companies use Azure, tying Microsoft’s cloud computing business to some of the largest and most stable businesses in America.
Azure has also been a bright spot in terms of growth. While Microsoft’s total revenue in the most recent quarter rose just 2 percent year-over-year, Azure saw its sales skyrocket by 31 percent.
With the cloud computing industry growing rapidly and Azure positioned as a prime beneficiary of that growth, it seems almost inevitable that Microsoft will continue to see strong results from Azure for several years to come.
Beyond Azure, Microsoft also has an extremely strong consumer segment. Although consumers are currently being pressured by inflation, Microsoft does not appear to be in long-term jeopardy of losing its power as a consumer tech provider. More favorable macroeconomic conditions will likely restore this business line, though it could be some time before consumer confidence rebounds.
No discussion of Microsoft’s prospects today would be complete without a mention of its AI products, especially ChatGPT.
The now-viral chatbot has generated enormous investor interest this year. While ChatGPT is not owned by Microsoft, the tech giant is integrating the chatbot into its own tools, particularly its search platform Bing.
Microsoft may also invest heavily in the company that created ChatGPT. Microsoft hopes that continued investment in its AI capabilities will make new products possible and continue driving high growth rates for the foreseeable future.
Another potential reason for buying Microsoft is to take advantage of its dividend growth potential. Although the stock yields just 1.03 percent today, Microsoft has raised the payout by over 10 percent annually over the last three years.
As Microsoft matures and finds fewer ways to invest in growth, more and more of its earnings will likely be allocated to dividend distributions. As such, the stock is appealing to dividend growth investors.
Taken together, Microsoft has plenty of room left to grow through continued innovation. As long as Microsoft can generate the revenue needed to fuel continued earnings growth – a virtual certainty -, investors will likely be rewarded with steady increases in share prices over multiple years.
Is Microsoft a Good Value?
At the moment, Microsoft trades for 28.5 times expected earnings. While on the high side for the current market, this ratio is far from out of line with the stock’s P/E history.
One somewhat concerning metric for Microsoft is its price-to-earnings-growth ratio, which is currently 2.44. Generally, values of 2 or over for PEG point to companies that are overvalued. Microsoft is expected to raise its earnings 12.7 percent in this fiscal year, with EPS rising to a projected $10.55 per share.
Microsoft does maintain a low debt-to-equity ratio. At the moment, this ratio is 0.24. As such, the company is likely in a good position to manage its debts and avoid excessive interest charges. The company also maintains a cash reserve of over $15 billion, giving it more than enough of a cushion while also allowing it to continue investing in new technology.
On the whole, Microsoft appears to be a fair value at today’s prices. We calculate fair value at $280 per share. This could create a good buying opportunity for investors looking for a long-term, blue-chip tech major.
Analyst Ratings
Analysts are generally bullish on Microsoft. Of the 50 analysts covering the stock at the time of this writing, 36 rate it as a buy. The stock also has 6 outperform ratings and 7 holds. This suggests strongly positive sentiment among professional investment analysts with little in the way of negative outlooks.
Despite this positive view on Microsoft, analysts do not expect the stock to generate outsized returns in the short term. Similar to our own calculations, analysts peg Microsoft intrinsic value at $281.55. This would represent a gain of just 6.8 percent from the most recent price of $263.64.
Analysts do, however, seem unified on the company’s ability to grow over the long term. Over the next 3-5 years, earnings are expected to grow at a compound rate of over 12 percent annually.
Alphabet Vs MSFT?
Due to its size, dominance and execution, Microsoft’s primary risk factors are macroeconomic in nature. In its most recent annual report, the company highlighted currency fluctuations, interest rates, commodity prices and its own equity portfolio as its major sources of market risk.
Challenges from a handful of equally large competitors could also be risks for Microsoft’s business. Amazon, for example, could successfully outcompete Microsoft for market share in the cloud computing space.
Despite a recent gaffe by its own AI chatbot, Alphabet has poured enormous amounts of money and resources into AI research. These two companies are among the few that could present serious problems for Microsoft, but the possibility for loss of market share in key areas still exists.
Is Microsoft a Good Stock to Buy on the Dip?
Microsoft ultimately appears to be what Warren Buffett might refer to as a wonderful business at a fair price. While the stock trades at a price that reflects Microsoft’s enormous future growth potential, it is a fair buy today. As such, investors with medium to long time horizons would likely do well to buy Microsoft’s dip.
Between its successful consumer tech business, a dominant role in cloud computing and enormous potential in AI, Microsoft is a company that could generate excellent long-term returns. Although the company is facing some macroeconomic headwinds at the moment, most of its problems seem temporary. The business itself is still performing well, making it an attractive buy-and-hold blue chip.
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