Microsoft Shares: Buy the Dip After Earnings Selloff

October 28, 2022

Software giant Microsoft Corporation (NASDAQ: MSFT) reported its Q1 FY2023 earnings earlier this week.

The company beat expectations on both revenue and net profit but slower cloud revenue growth led to a sell-off in the tech giant’s stock.

While Microsoft was among the biggest losers in the aftermath of the release of its earnings results, I think long-term investors should buy the dip in Microsoft shares.

Here’s why I think Microsoft’s earnings actually reflect the company’s resilience in the face of a potential recession.

Resilient earnings despite cyclical trends

Despite the near-term headwinds, Microsoft reported better-than-expected revenue and earnings during its Q1 FY2023 period.

Source: Microsoft’s Q1 FY2023 earnings slides

In Q1 FY2023, Microsoft recorded a year-on-year (yoy) increase of 11% in revenue to US$50.1 billion while earnings per share (EPS) was up by 4% to US$2.35 a share (after adjusting for a net income tax benefit related to the transfer of intangible properties in Q1 FY2022).

Both revenue and EPS beat Wall Street’s expectations of US$49.61 billion and US$2.30 a share, respectively.

Excluding the impact of the strong US Dollar, revenue would have increased by 16% on a constant currency basis.

This shows how the stronger dollar has impacted earnings of US corporations and Microsoft is clearly not immune to these external vulnerabilities.

However, the company’s resilience in its Productivity and Business Processes and Intelligent Cloud business segments reflect Microsoft’s moat within the Business-to-Business (B2B) segment.

Cloud revenue slowed but still impressive

Microsoft’s Azure revenue grew at a slower pace in Q1 FY2023.

However, despite this, it’s still growing at a pace of 35%, which is very impressive considering the current market environment.

It was a deceleration from the growth of 40% in the previous quarter and missed analysts’ expectations of around 36.5%.

Source: Microsoft’s Q1 FY2023 Results

However, Microsoft’s Azure growth continued to outpace Inc (NASDAQ: AMZN). In Amazon’s latest Q3 FY2022 earnings, Amazon Web Services’ (AWS) revenue grew 33% yoy.

I believe that the data continue to support a shift towards digital and cloud computing.

While the near-term negative impact, such as slower growth and higher energy costs, could affect margins, the long-term structural shift will put Microsoft in a stronger position.

Well-diversified business

Aside from that, Microsoft’s diversified business across various sectors give the software giant a large economic moat to weather a potential recession.

While the company is not immune to the impact of a recession, Microsoft is likely to outperform its tech peers in the near term.

The company’s exposure to the B2B segment also provides better clarity in terms of earnings as compared to companies that rely more on consumer spending.

Microsoft’s Intelligent Cloud business segment will continue to be a key growth factor while its Office Commercial products – within the Productivity and Business Processes – are likely to help offset the slowing consumer business.

Key risks in the near term

Despite my optimism on Microsoft’s growth prospects over the long term, the near term challenges are unavoidable.

Like most corporations in the US that have global exposure, the strong US Dollar will affect earnings in the immediate future.

I believe that this will continue to be reflected in the upcoming quarterly results.

Consumer weakness will continue to be a drag on the Personal Computer (PC) market. Coupled with higher costs, margin will also be affected.

Meanwhile, a potential recession will drag earnings further as investment by corporates in their digital strategies will likely be affected.

Look beyond Big Tech rout

The Big Tech rout continued as earnings failed to miss market expectations today.

It shows that the impact of rising interest rates and the shift towards value stocks.

However, Microsoft offers multi-pronged growth in other areas on top of its impressive Azure business.

Its expansion in gaming with its proposed US$69 billion acquisition of Activision Blizzard Inc (NASDAQ: ATVI) will complement its existing Xbox gaming console business.

It should also boost the expansion of its Game Pass cloud-based gaming subscription business.

Microsoft has also recently delivered its Hololens 2 to the US military. Initial feedback of its IVAS headset has been less than impressive but it also marks a way forward for the Augmented Reality/Metaverse part of its business.

What is interesting is how Microsoft has managed to pursue new growth opportunities while taking advantage of the existing structural shift towards digital transformation.

Microsoft’s moat in the commercial and business segment has allowed the company to thrive in other sectors.

So, while share price weakness is likely to persist, I believe long-term investors will want to take this opportunity to buy the dip in Microsoft stock.

Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.

Billy Toh

Billy is deeply committed to making investment accessible and understandable to everyone, a principle that drives his engagement with the capital markets and his long-term investment strategies. He is currently the Head of Content & Investment Lead for Prosperus and a SGX Academy Trainer. His extensive experience spans roles as an economist at RHB Investment Bank, focusing on the Thailand and Philippines markets, and as a financial journalist at The Edge Malaysia. Additionally, his background includes valuable time spent in an asset management firm. Outside of finance, Billy enjoys meaningful conversations over coffee, keeps fit as a fitness enthusiast, and has a keen interest in technology.

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