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Earnings season is in full swing right now, and it’s probably the most important in recent memory. High inflation is pushing up interest rates, hitting the consumer’s pocketbook and having a ripple effect throughout the economy. Earnings reports can provide key insights into how the corporate sector is meeting these challenges.
Microsoft (MSFT 1.57%) It is a great company to monitor as it generates healthy consumer and commercial revenues. It released its full-year results for fiscal 2022 (ended June 30), and while it missed some Wall Street expectations, there were certainly bright spots.
The technology is difficult Nasad 100 The index is currently trading in a bear market amid widespread economic uncertainty, meaning high-quality stocks like Microsoft are at a discount to all-time highs. Here’s why investors should take advantage of this opportunity to buy.
Microsoft is versatile.
In a tough economy, one of the best assets a company can have is a diverse portfolio of businesses. Multiple income streams can cover the risk of stagnation; When one part struggles, the other can often pick up the slack.
Microsoft is known for its Windows operating system and Office 365 document suite, used by billions of people around the world. But the company has invested in expanding its footprint to include LinkedIn, a professional networking platform.
Xbox was a drag in the fourth quarter of fiscal 2022, reporting an 11% year-over-year revenue decline on the hardware side and a 7% decline in content and services as consumers spent on gaming. Floor, however, showed a 10% jump in revenue, led by commercial sales. This could be a sign that firms are planning to expand, suggesting that they may have confidence in the economy.
But it was Microsoft’s cloud business that drove full growth in the fourth quarter and fiscal year 2022. Not to mention, it’s now the biggest revenue contributor to Microsoft overall.
Flying in the clouds
Microsoft divides its revenue into three main business categories: productivity and business processes, more personal computing, and intelligent cloud.
Intelligent Cloud will account for 37.8% of the company’s total revenue in fiscal 2022, and that figure has steadily increased in recent years as the segment has grown faster than the rest of Microsoft. It now leads the company’s other two divisions by revenue.
Intelligent cloud with 25 percent growth in fiscal year 2022 doesn’t tell the whole story because, at the bottom line, Microsoft’s Azure platform grew by 45 percent. From data storage to virtual machines to artificial intelligence and machine learning tools, Azure offers hundreds of cloud services and solutions for businesses to maximize their customers’ workloads.
Azure’s rapid growth indicates that organizations are still investing heavily in the technology, which is a sign of their confidence in the future.
The chart below of Microsoft’s total revenue provides a benchmark to compare how fast the intelligent cloud is growing compared to the company itself.
Microsoft stock has significant long-term potential.
Microsoft stock fell 18 percent. Investors should use this dip as an opportunity to buy as the company has many opportunities on the horizon.
For starters, Microsoft is competing. Amazon To achieve a high position in the entire cloud industry. They’re vying for a slice of what could be a $1.5 trillion annual opportunity by 2030, according to Grandview Research, so Microsoft’s smart cloud division could continue to outperform the rest of the company in the coming years.
Microsoft plans to acquire a video game developer Activision Blizzard More than 68 billion dollars. The studio is responsible for blockbuster titles such as Call of Duty and World of Warcraft, and if the deal is approved by regulators soon, as expected, it will add an entirely new dimension to Microsoft’s gaming business and propel the company even further.
Microsoft will generate $72.7 billion in net income (profit) in fiscal 2022, which translates to earnings per share of about $9.65. That puts the stock at a price-to-earnings multiple of 27.8, just a slight 8% premium to the Nasdaq 100 index’s multiple of 25.7.
In the year In 1986, Microsoft stock returned more than 268,000% since it was listed on the public markets. That $10,000 investment could have turned it into $26.8 million. Given the company’s potential in this light, there’s a strong argument for the stock to continue to significantly outperform the broader tech market and, therefore, trade much higher than it currently is.
John McKee, CEO of Whole Foods Market, a subsidiary of Amazon, is a member of the Motley Fool’s board of directors. Anthony Di Pizio has no position in the mentioned shares. He has spots in The Motley Fool and recommends Activision Blizzard, Amazon and Microsoft. The Motley Fool has a disclosure policy.
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