Even among Big Tech firms, Microsoft is a standout business that touches practically every digital element of our lives. They are even selling ads for Netflix now!
In a sea of red, one that is filled with horror stories and lost fortunes, brave investors look for opportunities. This mindset is what separates long-term wealth creators from those who tell their friends at the next get-together that markets are full of broken promises.
Persistence is key!
Of course, there have been winners this year. Most of them are cyclical stocks that have enjoyed extraordinary profits in the wake of the pandemic. The key word here is “cyclical” – these are not buy-and-forget stocks for the top drawer of your cupboard. Those share price gains can disappear just as suddenly as they arrived.
If you missed those boats, it’s best to just let them go. Chasing cyclical stocks is an excellent way to ruin your portfolio.
Markets are all about timing, particularly for traders. If you are an investor, then success is about picking great companies and taking advantage of juicy (or at least sensible) entry points to give some extra zing to your returns. Those sell-offs are often driven by short-term pressures, like a quarter of weak earnings guidance. When investing in non-cyclical businesses, that’s an opportunity rather than an issue.
If you are investing for the next decade, do you really care about one bad quarter in 2022?
This is why I happily bought more Microsoft shares in my portfolio in the past week.
Microsoft Corporation Inc (MSFT)
In Satya we trust
Among the big tech firms, Microsoft’s investment thesis is compelling. It doesn’t rely on a closed ecosystem (like Apple) or a hope and a prayer (like Meta). Instead, Microsoft focuses on having multiple touchpoints that tap into practically all the digital growth trends we are seeing in the world.
Of all the dips in the past week, Microsoft looked like the most compelling option for me. I did it. I bought the dip.
CEO Satya Nadella leads a business that keeps finding new ways to grow. No business is without challenges of course, but Microsoft has enough diversification in the group that there’s always something going on.
For example, you’ve possibly never heard of GitHub. Since being acquired by Microsoft, user numbers have tripled and this is now a $1 billion annualised recurring revenue (ARR) business. Microsoft recently acquired a business called EduBrite, which will further improve LinkedIn by allowing its 875 million members to earn professional certificates through the platform.
As annoying as the average LinkedIn post is, there’s no debate around the platform’s financial attractiveness. With an exceptional niche and a strong business model, Microsoft owns one of the best social media businesses in the world.
We haven’t even touched on the core businesses yet. In Azure, Microsoft has a massive cloud business that is still growing strongly (although there is some concern over how long this can continue for). In bad news for Zoom investors, 55% of enterprise customers who use Teams have also bought Teams Phone. In fact, the average commercial user now spends more time in Teams than in email!
You like Netflix?
Netflix reckons that its new ad-supported tier will only be a revenue-neutral initiative for the streaming group. Here’s the really interesting part though: Microsoft is selling the ads! Yes, Microsoft has an advertising business that sells ads in Windows products and in Bing. Goodness knows that Netflix is a lot more marketable than either of those.
It may be revenue-neutral for Netflix but that won’t be the case for Microsoft. Again, a perfect example of the multiple touchpoints enjoyed by the group.
Best of all: they don’t ignore the macro
Unlike Meta, where Zuckerberg is going to ruthlessly invest in Reality Labs regardless of what the market thinks, Microsoft takes a more measured approach.
In a down market, Microsoft looks to “stay consistent” and invest for growth. Importantly, they “don’t ignore the macro” and they are willing to dial back expense growth where it makes sense to do so.
For example, headcount isn’t envisaged to grow in the next quarter on a sequential basis. When US companies talk about sequential numbers, this means the next quarter vs. the one just ended. The other (and more common) way of measuring growth is on a year-on-year basis.
Showing a strong appreciation of concerns in the market, the opening paragraph of Nadella’s prepared remarks noted a promise to be “disciplined in managing” the cost structure. This is what the market was looking for.
It can’t all be smooth sailing
The strong dollar is hurting Microsoft, just as it is hurting every leading tech company. With a global client base, the international revenue is diluted by the strength of the dollar.
Gaming is under pressure. Console sales look good but content is going sideways, admittedly against a strong base. Microsoft is in the process of acquiring Activision Blizzard in a deal that various competition authorities would need to sign off on. It makes sense to get access to that content, which is precisely why regulators are taking a close look.
There are bigger problems in the PC market, with demand under pressure and a knock-on impact in Windows OEM and Surface businesses. In the next quarter, Microsoft expects a whopping decrease in Windows OEM in the “high 30s” – not what anyone wanted to hear!
In an economic downturn, there’s always pressure on advertising spend by companies. This impacts several areas of Microsoft’s business.
With free cash flow down year-on-year, there’s a bump in the road here for Microsoft. Bumps are great buying opportunities when you believe in the long-term thesis.
The biggest risk to growth is Azure, only because it has been such a strong contributor to the story in recent year. This is why the analyst questions on the earnings call tended to focus on this area. A significant slowdown in cloud would cause more pain in the Microsoft share price.
Over the next decade though, I’m not going to bet against the digitalisation of the world. I’m certainly not going to bet against Microsoft’s leading position in that trend.
Microsoft Corporation Inc (MSFT)