With fears rising about a potential slowdown in the economy, if not an outright recession, many investors are scrambling to find viable investment ideas. Under this framework, value stocks present an intriguing idea because of their underlying established businesses. However, intrepid investors ought to consider the technology sphere, specifically software giant Microsoft (NASDAQ:MSFT). Offering myriad relevancies, it’s an idea that fits in almost any market cycle. I am bullish on MSFT stock.
At first glance, technology firms may not seem like a smart place to protect your wealth against a possible economic storm. Though exceptions exist, the tech sector tends to be focused on growth. However, with the flow of cheap money in prior years likely to come to a shuddering halt this year (and beyond), many popular names in the segment suffered severe declines.
To be fair, MSFT stock is one of them, absorbing a loss of 27% on a year-to-date basis. Nevertheless, out of the myriad opportunities in the digitalization segment, Microsoft arguably presents one of the (relatively) safest profiles for concerned investors. Fundamentally, the company is tethered to several relevant industries.
From its dominance in desktop operating systems to its Software-as-a-Service (SaaS) business model to its video gaming arm, Microsoft can adapt to dynamic market environments because it can pivot effortlessly from one relevant market to another.
While it’s not anything to write home about, MSFT stock also features a dividend yield of 1%. As well, the underlying company features 19 consecutive years of dividend increases, a statistic that management is probably unwilling to let go of considering its marketing appeal to prospective investors. Therefore, Microsoft simply makes sense as an “everyman” play.
MSFT Stock Rates as Undervalued
Immediately, one of the reasons why investors should target MSFT stock as part of their market wish list is the valuation component. Relative to the underlying industry, Microsoft rates as reasonably undervalued.
In fairness, a countervailing point to the above is that Microsoft “deserves” its undervalued status. As TipRanks reporter Sheryl Sheth pointed out in late July of this year, the tech firm “failed to meet fourth-quarter expectations on both revenue and earnings count.”
Specifically, Sheth stated, “Microsoft attributed the weak quarterly performance to unfavorable foreign exchange rates, extended shutdowns in China, slowing personal computer (PC) demand, and sluggish advertising spending. Additionally, the company recorded operating expenses to the tune of $126 million related to bad debt expense, asset impairments, and severance owing to its decision to scale down its Russian business.”
Nevertheless, Microsoft, on a long-term basis, presents excellent growth and revenue trajectories. For instance, its three-year sales growth rate is 17.4%, significantly higher than the software industry’s median of 6.9%. As well, Microsoft features an operating margin of over 42%. That’s an elite figure in the software segment, which features a median operating margin of only 2.83%.
Therefore, with a YTD discount of 27%, MSFT stock may be too enticing to ignore.
Fundamentals are Strong for MSFT Stock
While investors can play with the math undergirding MSFT stock until they’re blue in the face, mere arithmetic exercises can’t fully convey the potential improvements in human efficiencies that Microsoft embodies. Put another way, MSFT enjoys myriad fundamental catalysts which are too lengthy to list comprehensively.
Nevertheless, a few catalysts stand out. Primarily, Microsoft Windows dominates the operating system (OS) market for desktops with nearly 75% share. Coming in an extremely distant second place is the Apple (NASDAQ:AAPL) OS X with 14.4% market share. The other named OSs are so minuscule that they’re not worth mentioning.
The above dynamic is important to mention because when it comes to getting stuff done, people prefer using Windows-based computers, and this segues into another topic, which is Microsoft’s SaaS solutions. Essentially, businesses around the world operate on programs such as Word and Excel. They don’t depend on the Apple alternatives of Page and Numbers.
Cornell University may have said it best. Because computers around the world basically run on Windows, “not being familiar with the software actually puts people at a disadvantage.” In some ways, then, Microsoft enjoys a hostage audience.
Moreover, Microsoft isn’t about all work and no play. Part of the company’s long-term success focuses on its Xbox video game console. In April 2022, the latest-generation Xbox consoles represented the top-selling units in the underlying segment. While gaming itself has suffered some loss of engagement due to revenge travel phenomenon, the sector will almost surely make a comeback in the years to come, especially after societies fully normalize following the COVID-19 disaster.
What is a Good Buy Price for MSFT Stock?
Turning to Wall Street, MSFT stock has a Strong Buy consensus rating based on 28 Buys, two Holds, and zero Sells assigned in the past three months. The average MSFT price target is $327.41, implying 33.8% upside potential.
Takeaway: Microsoft Stock is a Reliable Investment
A significant part of the reason why the current market environment presents considerable anxieties is its unprecedented nature. Investors simply lack a framework on how to handle a hawkish environment following a once-in-a-century pandemic. However, because Microsoft carries so many relevancies, it’s difficult to ignore MSFT stock as a reliable investment.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.