In writing about financial markets, I try to stay away from superlatives. They are usually exaggerations, no better than someone saying something like “the best restaurant in the world!” after eating at maybe a couple of hundred or so of the world’s roughly 15 million eating establishments. When it comes to the stock market, superlatives just tend to come back to bite you in the behind. Circumstances around stocks change quickly, and what looks like the best buy one day can easily become a complete dog just a few days later.
Today, though, I am going to make an exception, and say that Microsoft (MSFT) is the single best stock to buy on the current weakness.
By that, I don’t mean that MSFT will have gained more than any other stock in six months or a year from now. There is bound to be a suddenly trendy company or some meme stock that claims that honor. No, what I mean is that MSFT gives investors the best chance of a good return over time, while minimizing downside risk. The reason for that belief was obvious yesterday afternoon when the software giant released calendar Q1 2022 earnings.
To be honest, the Q1 results didn’t fall in the category of a spectacular blowout, but then Microsoft earnings never do. It is one of the most scrutinized and analyzed corporations in the world, so the average estimates for EPS and revenue are rarely far from the mark. What those results were, though, was another example of Microsoft under Satya Nadella’s leadership outperforming expectations in a challenging environment and, once again, posting growth in every area of their business.
For the record, they reported EPS of $2.22 versus a consensus estimate of $2.18, a fourteen percent increase from a year ago, on revenue of $49.36 billion, as compared to the forecast $49.05 billion. As I said, not a blowout by any means, but solid growth, and it was accompanied by guidance for more of the same for a while to come. Most people will probably focus on the continued success of the company’s Intelligent Cloud segment, which includes Azure. That is understandable given that division’s 46% growth, but more impressive to me is the double-digit growth in older, less flashy divisions, such as Windows and Office 365.
These may not have the potential of cloud services and the like, but they are the backbone of Microsoft’s revenue and one thing in particular stood out there: The company was able to manage the inflationary environment and raise prices, without damaging sales. That shows a brand loyalty that will trickle down to other products and will be essential over the next year or so if inflation stays with us.
Despite all that, MSFT has underperformed the market so far in 2022. It has been caught up in the whole “big tech growth bad!” thing, and prior to yesterday’s numbers, had dropped seventeen percent, compared to a twelve percent loss for the S&P 500 over the same time. The stock jumped on earnings and the general bounce back this morning, which makes me think there will probably be better entry points than this to be had over the next few days as the bearish mood regarding stocks overall returns, but even if you buy now, just a return to the levels of the start of the year would offer an upside of over sixteen percent.
For a company that has consistently beaten expectations, has shown an ability to grow in good times and bad, and has the kind of brand identity that will be a benefit in an inflationary environment, that is quite remarkable, as is the fact that despite that growth, MSFT has a P/E right around the market average. Traders and investors, it seems, keep expecting Microsoft’s growth to fade away, and the company keeps proving them wrong. On the basis that they will continue to do so and given the limited long-term downside of such an iconic company, it doesn’t seem like a stretch at all to say that MSFT is indeed the best stock to buy on this drop.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.