It’s hard to find a reasonable argument against investing in Microsoft (NASDAQ:MSFT). That’s the case whether shares are trending higher, as they were for most of the past five years, or in a slump, as they are now. In fact, I would say the 16.5% pullback in MSFT stock so far this year makes shares even more attractive. I wouldn’t even call it a contrarian bet.
Business is booming, as evidenced by the strong earnings report and forecast the company delivered last month. Yet, even this only provided a temporary reprieve for shares, which again turned lower following their post-earnings pop.
However, the recent selling has everything to do with broader market weakness and bearish sentiment for tech stocks and nothing to do with Microsoft.
You Can’t Beat the Fundamentals of MSFT Stock
On Jan. 25, Microsoft reported results for its fiscal second quarter, ended in December. Revenue rose 20% year over year to $51.7 billion, beating expectations. Net income was up 21% from a year earlier to $18.8 billion, or $2.48 per share, also topping analysts’ estimates.
Growth in its Azure cloud computing service and Dynamics 365 products were particularly strong, up 46% and 45% year over year, respectively.
The growth in Azure represented a modest slowdown from the prior quarter’s 48% growth, sparking some concerns. But management forecast its Intelligent Cloud division, which includes Azure, would generate $18.75 billion to $19 billion in revenue for the fiscal third quarter, above the $18.15 billion analysts were expecting.
Cloud computing is by far Mircosoft’s biggest revenue generator. However, according to Morgan Stanley analyst Keith Weiss, Dynamics 365 could be one of the company’s fastest-growing segments, increasing at a compound annual growth rate (CAGR) of 23% over the next five years. Dynamics 365 is an enterprise solution that promises to increase connectivity within organizations.
LinkedIn was another bright spot in the company’s latest earnings report. The social networking site saw revenue increase 37% revenue from a year ago. This was likely due in part to changes in the labor market, with many professionals looking to change jobs in order to secure better pay or other benefits.
Interestingly, LinkedIn is testing a no-politics filter, which some users currently have the option of enabling. Given what a polarized cesspool most social media platforms have become, this could set LinkedIn even further apart and make it increasingly important to Microsoft.
Looking Ahead
You’ve no doubt seen the news that Mircosoft is looking to acquire Activision Blizzard (NASDAQ:ATVI) in a $68.7 billion all-cash deal. If successful, the acquisition will expand Microsoft’s gaming division and give it inroads into the metaverse.
I’ve already mentioned the company is expecting growth to accelerate this quarter in its flagship cloud division. The strength of the cloud computing segment, combined with the 400 million-plus Office suit users, has Morgan Stanley’s Weiss predicting the company will see revenue increase by $190 billion through 2026, a 15% CAGR. Of that, he believes $120 billion will come from Azure.
Weiss also estimates earnings could hit $20 per share in 2026, up from the $9.35 per share analysts are forecasting for the current fiscal year.
I’d say Weiss and I draw an identical conclusion when considering an investment in MSFT stock. As he puts it, it’s “a good bet for investors looking for assets with strong growth drivers, solid pricing power, and earnings growth that can outpace inflation.”
The Bottom Line on MSFT Stock
Mircosoft has multiple strong businesses underpinning its growth for years to come. This means MSFT stock is likely to continue to reward investors as it has done consistently in the past. The pullback in shares simply implies greater upside.
Savvy investors will use the correction in MSFT stock as an opportunity to load up on shares before they inevitably move back up.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.