Is Microsoft Stock A Buy Right Now?

Price Target: Unlock 🔒 

Current Price: $243

Target Date: Unlock 🔒 

Stock: Microsoft ($MSFT)

There was a single word repeated over and over again at Microsoft's earnings call last week: "Caution." 

CEO Satya Nadella used that word half a dozen times in his brief remarks during MSFT's earnings and the market sure responded to it.

Microsoft stock fell slightly due to a bunch of different factors -- all of which got blown up pretty wildly by the media. 

But cutting through the noise of all that immediately, there is a single question at the heart of our Microsoft strategy in 2023: Is cloud revenue declining or stabilizing? 

Analysts are getting more and more cagey about cloud computing and whether or not it can grow enough to justify massive valuations for the likes of Microsoft and Amazon.

Cloud is such a profitable business line that it's hard not to throw a bunch of money at it. 

But Azure's revenue growth declined for the fifth straight quarter, hitting its lowest point at 31% growth, during this earnings call. That's enough of a trendline to keep some investors on the sidelines since Microsoft's valuation depends on continued cloud growth. 

Looking at the numbers and accounting for MSFT's brilliant bundling strategy, we've decided that we're still bullish here. 

The growth in Office 365 is doing exactly what we need, and there is a single line in Azure's growth trajectory that is making us bullish for the year at least. 

Who cares about a recession? This is the year Microsoft proves it's the operating system for the future of enterprise.

Let's get into it 👇  

The Azure Slowdown:

This is the biggest (yet dullest) narrative we're working with this year. Just to make it clear again, it boils down to one question: "Are investors becoming more bearish on cloud growth?" 

The one thing on this earth the market loves more than anything else is high margins. Profit is king above all. High profitability is what makes Tesla so insanely overvalued no matter what malarkey Elon Musk gets up to.

If you're profitable and can show those profits will increase -- you're gonna get just a boatload of cash coming your way.

For the back half of the 2010s, cloud was the golden goose of tech.

Amazon got so good at internet infrastructure that they began charging for it with AWS -- and it's to the point now that AWS is so wildly profitable that it is frankly holding up Amazon's entire languishing e-commerce platform. 

But industry-wide, a lot of the future profitability is already priced-in. So if growth and profitability slow down at all, that can have an outsized effect and spook the market. 

So when we say that Microsoft Azure only grew 31% in the last quarter -- that's actually a big deal and not us just being revenue-crazed maniacs. 

So we really had to dig deep into the revenue and trends at Azure to make sure we are still bullish on Microsoft as a whole. If Azure starts to fail, it will absolutely tank MSFT overall. 

But looking at Azure's overall growth and overall demand in the industry, our view is that Azure is in the exact right place to keep Microsoft afloat even if industry spending is slowly leaving the cloud space.

We arrived at this conclusion based on two factors: 

• Azure is hitting equilibrium, not decelerating.  At some point, consistent >40% growth becomes unsustainable. Azure topped $15 Billion in revenue on its own (while all of the intelligent cloud topped $20 Billion).  With industry spend drying up, we don't think Azure is ever going to hit 40% QoQ growth again. At the same time, however, we don't anticipate Azure ever dipping down below 30% either. More realistically, Azure will grow between 30% and 34% for the next few quarters. If they pull that off, then they can realistically hit $20 Billion in quarterly revenue sometime next year. That's enough growth at a high enough level to get the rest of Microsoft's businesses growing in the right direction. 

• Azure is the #1 destination for new cloud spend. Industry surveys are showing that while HP, Oracle, and Dell enterprises are absolutely hemorrhaging cash, all that capital is flowing to Microsoft and AWS. This is mainly because of Microsoft's hybrid model, their really attractive bundling, and their robust security. Security has been the #1 issue for IT departments as they deploy cloud architecture, and Microsoft is a solid bet with their system meant for larger, easier-to-attack enterprises. The commitment to security is also why you'll be seeing additional bullish sentiment from us for Palo Alto Networks in the next few weeks, so stay tuned for that scintillating piece of analysis.  

Long story short: Azure is just big enough and just the right product to keep the necessary amount of revenue flowing into Microsoft. It grows cheap, and that growth is getting cheaper all the time thanks to bundling.  

Bundling Still Wins:

We've talked about this a lot, but Office 365 and other productivity products are going to gradually take over as growth drivers for Microsoft on the back of enterprise deals.

This earnings call proved that out as commercial productivity grew 7% while consumer productivity products lost 2% in revenue QoQ.

Microsoft is establishing itself as the operating system where big business gets done.

7% growth isn't as wild as 31%, but productivity growth is finally starting to accelerate and take over for Azure.

As long as Microsoft keeps making these huge Azure deals and upselling office 365 through them, then we are going to return to the good old days when every single business and commercial office was powered by Microsoft infrastructure. 

Microsoft Outlook:

There are a lot of other factors that make Microsoft attractive right now.

Personal computing is only down because supply chains are still strained. A lot of the slowed growth at Microsoft is due to foreign exchange and the wild strength of the dollar for the back half of last year.

With supply chains getting stronger and stronger and with the dollar weakening like CRAZY, we see MSFT recovering a solid chunk of revenue from an improving global macro environment -- even if a recession actually hits. 

But most importantly, we like Microsoft's current valuation.

MSFT is trading at about 20x revenue -- which is way better than Amazon's 33x.

A lot of pain is already priced into Microsoft's current level, with investors anticipating slower growth. With that in mind, we really like Microsoft's growth prospects going into 2023, but in the same breath, we're looking for lots more revenue lines to justify Amazon's valuation. More on that in a later article though. 

All in all, Microsoft is at the exact right size to take a few hits should the economy get even darker this year.

We're really excited to see where they grow this from here.

Risk/Reward: Medium / Medium

Rating: Overweight

Dividend Yield: 1.11%

Market Cap: $1.8 Trillion