Take advantage of the bear market with Microsoft Stock

It’s official. Last week the S&P500 joined the Nasdaq Compound and fell firmly into bearish territory, meaning it is down more than 20% from its recent high. For many investors, it is disconcerting to be in the middle of a crashing market. It seems like every day there is catastrophizing and another “expert” with another perspective on why it’s down and when it will come back up.

What you need to know is that no one knows when the recession will end. The best assurance we can offer is that it will end. When the bull comes back, you have to be ready to take it by the horns. Long-term investors can use a bear market to their advantage. After all, good investors don’t want to buy high and sell low, do they?

Let’s look at the qualities you’re likely to find in a downtrend stock that will help it go up. Qualities such as earnings, cash flow, seasoned management and growth opportunities all come to mind. Microsoft (MSFT 3.42%) has it all in spades.

Microsoft has seasoned management for turbulent times

Microsoft CEO Satya Nadella leads a team that has done some impressive work recently. You only have to go back to March 2020 to see this leadership in action. With significant economic uncertainty, Microsoft posted record revenue and operating profit for shareholders.

Data source: Microsoft. Table by author.

The company has taken advantage of these gains in the first three quarters of fiscal 2022 (Microsoft’s fiscal year ends in June). One of the greatest testimonies of a well-run organization is its profitability. Microsoft is extremely profitable and continues to grow its margins, as shown below. In comparison, Alphabet posted an operating margin of 31% in 2021, a very successful year for the company.

Microsoft operating margin

Data source: Microsoft. Table by author.

Microsoft’s leadership team has a proven track record in meeting our current economic challenges.

Microsoft has its head in the clouds

Microsoft continues to dominate the software industry with its core Office and Windows products, but its future lies in the cloud. Spending on cloud infrastructure is exploding and expected to grow 20% this year, says Gartner. Azure, Microsoft’s cloud infrastructure platform, is engaged in a battle for supremacy with Amazonit’s AWS.

This sector is very lucrative. Microsoft’s Azure and other cloud services segment saw an astonishing 46% year-over-year growth in the last quarter, alongside 29% growth in the company’s server products and cloud services. In total, the intelligent cloud revenue stream generated $54.3 billion of Microsoft’s $146.4 billion in sales in the third quarter of FY22.

Another great quality of Microsoft is that the company never lets itself stagnate. Rather than being content with recent results, the company announced the successful acquisition of ActivisionBlizzard (ATVI 1.90%) for $69 billion earlier this year.

Activision will bring popular game franchises like Call of Duty, candy Crushand StarCraft. This will make Microsoft the third-biggest games company by revenue if the deal receives regulatory approval. These impressive forays into cloud computing and gaming make Microsoft a leader in two other fast-growing areas.

Microsoft generates its cheapest valuation in years

Microsoft stock is not immune to the market slump, even if its results remain excellent. The stock is down more than 25% this year. This brought the price to earnings (P/E) ratio to its lowest level since the March 2020 crash and, before that, early 2019. Meanwhile, earnings continue to rise, as shown below.

Graph of MSFT PE ratio

MSFT PE Ratio data by YCharts

Investors can also pocket a modest but growing dividend. The company’s dividend has increased every year since 2006 and currently yields around 1%.

No stock is risk-free as recession fears linger on the horizon and Microsoft stock could continue to fall with the market. It is unlikely to catch a stock at its lowest price; predicting this accurately is nearly impossible. A step buying strategy, such as average buying, is a great way to mitigate short-term market risk.

Microsoft has all the qualities investors look for in a long-term winner and is firing on all cylinders. The stock has rewarded long-term shareholders for years, which looks set to continue once the bear returns to hibernation.

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