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Microsoft: Trading At An 18-Month Low, Stock Is Worth A Buy

By Jesse Cohen/Investing.comMarket OverviewSep 23, 2022 05:45AM ET
www.investing.com/analysis/microsoft-trading-at-an-18month-low-stock-is-worth-a-buy-200630204
Microsoft: Trading At An 18-Month Low, Stock Is Worth A Buy
By Jesse Cohen/Investing.com   |  Sep 23, 2022 05:45AM ET
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  • Microsoft fell to its lowest level since March 2021 on Thursday
  • The shares are down 28.3% year-to-date and 31.1% below all-time high.
  • Investors should consider buying the dip

Microsoft's (NASDAQ:MSFT) stock has struggled over the past several months, hitting a series of fresh 52-week lows, as fears over the Federal Reserve’s aggressive rate hike plans triggered a brutal selloff in shares of many top-rated technology companies.

MSFT has tumbled 28.3% year-to-date through Thursday, while the S&P 500 has declined 21.2%.

MSFT Daily
MSFT Daily

With a market cap of $1.79 trillion, the Redmond, Washington-based software giant is the world’s second-most valuable company, trailing only Apple (NASDAQ:AAPL).

Despite recent volatility, I remain positive on Microsoft and expect shares to bounce back in the months ahead, considering its healthy balance sheet, high free cash flows, and a highly diversified business model which has helped it withstand challenging economic times in the past.

Microsoft reported $105 billion in cash and short-term investments offset by debt of $47 billion. It generated a free cash flow margin of 33% in the last 12 months.

Commitment To Shareholder Returns

The tech behemoth has proven over time that it can sustain a slowing economy and still provide investors with higher payouts.

Microsoft’s board of directors declared a quarterly dividend of $0.68 per share earlier this month, up 10% from the previous quarter's dividend of $0.62.

It should be noted that the 10% dividend increase is higher than the current CPI inflation rate, which stands at 8.3%.

The new dividend, which amounts to $2.72 per share on an annualized basis, will be payable on Dec. 8 to stockholders of record on Nov. 17 offering an annual yield of 1.14%, which compares with the yield for the Technology Select Sector SPDR® Fund (NYSE:XLK) of 0.95%.

The latest dividend hike marks the 20th consecutive year in which Microsoft has paid more in annual dividends than in the previous year, highlighting the software giant’s ongoing commitment to returning capital to shareholders.

MSFT Dividend Growth
MSFT Dividend Growth

Analysts Remain Bullish

Not surprisingly, Wall Street has a long-term bullish view on Microsoft, as per an Investing.com survey, which revealed that 47 out of 50 analysts covering the stock rated it as a ‘buy,’ offering 38.4% upside potential, thanks to robust demand for its cloud-based offerings.

MSFT Analyst Estimates
MSFT Analyst Estimates

The average fair value for Microsoft’s stock on InvestingPro+ according to a number of valuation models implies a 22.3% upside from the current market value.

MSFT Fair Value
MSFT Fair Value

Fiscal Q1 Earnings Coming Up

Microsoft—which missed expectations on both the top and bottom lines in the previous quarter for the first time since 2017—is scheduled to release its latest financial results after the U.S. market closes on Tuesday, Oct. 25.

Consensus estimates call for the software and hardware company to report earnings per share of $2.33 for its fiscal first quarter, improving 2.6% from EPS of $2.27 in the year-ago period.

Revenue is expected to rise 10% year-over-year to $49.8 billion, reflecting strong demand for its cloud computing products.

As such, growth in Microsoft’s booming ‘Intelligent Cloud’ unit, which includes Azure, GitHub, SQL Server, Windows Server, and other enterprise services, will be in focus.

The key segment saw sales growth of 20% in its most recent quarter to $20.9 billion, while revenue from its Azure cloud business grew 40%.

Bottom Line

In my view, the significant pullback in Microsoft’s stock has created a compelling buying opportunity given the promising long-term demand outlook for its cloud business, software tools, and hardware devices.

The company’s dependably profitable business model and enormous cash pile have allowed it to increase its focus on returning more capital to shareholders, further enhancing its investment appeal amid the current bear market environment.

Disclosure: At the time of writing, Jesse has no position in any stock mentioned. The views discussed in this article are solely the opinion of the author and should not be taken as investment advice.

Microsoft: Trading At An 18-Month Low, Stock Is Worth A Buy
 

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Microsoft: Trading At An 18-Month Low, Stock Is Worth A Buy

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Comments (9)
Son Yay
Son Yay Sep 23, 2022 11:08AM ET
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Just 18 months? Pfft, wait for 36 month low, the cheap money-era is over. I want to see MSFT crash to 10x P/E. When UE is 6% again there is less people using computers. I'll bid 100 @ $99.00
Son Yay
Son Yay Sep 23, 2022 10:35AM ET
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"Don't buy the dip. Buy the collapse." -Bubba Born, September 24th 2022. This guy gets it.
Raghu Raghavan
Aptosian Sep 23, 2022 10:06AM ET
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Move away from computers .. buy today FANG DQ etc... to get out of the whole faster
Raghu Raghavan
Aptosian Sep 23, 2022 10:03AM ET
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No way at a pe of 26.
Don Vo
Don Vo Sep 23, 2022 10:03AM ET
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No and trash the market
Erikke Evans
Erikke Sep 23, 2022 9:54AM ET
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At the time of this writing Jesse has no position in any stock mentioned....but it's worth a buy.
Richie Berg
Richie Berg Sep 23, 2022 9:45AM ET
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1.14% dividend yield versus 2.7% 4-week Tbill. Hmmmm
Bubba Born
Bubba Born Sep 23, 2022 9:36AM ET
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Don't buy the dip. Buy the collapse.
Son Yay
Son Yay Sep 23, 2022 9:36AM ET
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Bubba gets it.
Mohd Izhar Muslim
Mohd Izhar Muslim Sep 23, 2022 7:03AM ET
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Thank you for sharing the article 💯
 
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