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The past 12 months haven’t been easy for tech companies, with the Nasdaq-100 Technology Sector index down 40% year to date. Rising inflation and interest rates in 2022 slowed consumer demand for tech products. According to IDC, worldwide PC shipments declined 15% in the third quarter of 2022, while smartphone shipments fell 9.7%.
As a result, some of the biggest names in tech have watched their stocks tumble. As a leader in the battered PC industry, Microsoft (MSFT 2.76%) has seen its shares slip 29% since January. However, the company is in a far better financial position than its stock dip would suggest.
Here’s why a stock market sell-off in 2022 makes Microsoft a must-buy.
Windows is easily the most successful operating system (OS) in history, holding a minimum 70% market share since 2013 despite Alphabet‘s Chrome OS and Apple‘s macOS challenges to that position. While Windows has catapulted Microsoft into a dominating position in the tech world and solidified its reputation as a crucial player in the PC industry, the company is so much more.
Microsoft is also home to a thoroughly diverse business with growing market shares in other lucrative industries. Its alternative brands, such as Office, Xbox, LinkedIn, and Azure, have given the company growing dominance in gaming, productivity software, enterprise resource planning, social media, and cloud computing. Microsoft’s venture into other industries has increased the reliability of its stock by safeguarding its revenue against economic declines.
For instance, in the first quarter of its fiscal 2023, Microsoft’s revenue gained 11% year over year to $50.1 billion, while operating income rose 6% to $21.5 billion. The company reported growth despite revenue in its PC-focused segment slightly declining and operating income decreasing 15% to $4.2 billion.
The growth was mainly thanks to some of Microsoft’s segments being less affected by macroeconomic headwinds. The company’s intelligent cloud segment saw revenue increase 20% year over year to $20.3 billion, with operating income rising 17% to $8.9 billion. Microsoft’s productivity and business processes segment also enjoyed a revenue increase of 9% to $16.4 billion, with operating income rising 10% to $8.3 billion.
With 2022 almost in the rearview mirror, Microsoft investors have plenty to look forward to in the new year and over the long term.
The company’s cloud computing platform Azure has achieved a 21% market share in the $369 billion industry, which is expected to see a compound annual growth rate of 15.7% until 2030. Next year, Microsoft has plans to grow its market share by building new data centers in at least 11 new regions, with CEO Satya Nadella revealing that the company is especially “bullish” about Asia as a “massive growth market.”
Moreover, Microsoft has big plans for its Xbox gaming division. The company has already made significant strides in the console and PC side of the industry, but wants to expand further by acquiring Activision Blizzard (ATVI 0.93%) in 2023 in an all-cash deal valued at $68.7 billion.
As Activision is home to one of the industry’s most profitable game franchises, Call of Duty, regulatory approval has held up the deal as countries worldwide scrutinize the acquisition over antitrust concerns.
In recent news, the Federal Trade Commission filed a lawsuit to block the deal, with Microsoft immediately arguing that “the acquisition of a single game by the third-place console manufacturer cannot upend a highly competitive industry.” The company has also made promises not to make Call of Duty exclusive to Xbox consoles in an effort to keep the playing field level.
Meanwhile, the U.K.’s Competition and Markets Authority’s assessment of the deal involved inviting the public to weigh in, with about 75% of responses being pro-merger. One view in favor of the deal said, “Sony and Nintendo are stronger than Microsoft in console gaming, and the merger will help Microsoft to compete more closely against them.”
Only time will determine which way regulators lean. However, if it goes through, Microsoft will become the third-largest games company in the world. It will also have an incredibly compelling way to attract more consumers to its consoles and to Game Pass, its subscription service where players can access a huge library of games for a monthly or yearly fee. Microsoft has said in the past that it wants Game Pass to be the “Netflix for games.” If the Activision acquisition goes ahead, Microsoft will be able to add Call of Duty to its ever expanding line up, getting the company a lot closer to its goals.
Either way, the power of Microsoft’s diverse business should continue to push it forward in different industries. Even with a sell-off in 2022, Microsoft shares are up 179% in the last five years and are likely to continue growing in the long term, making it an excellent investment after a stock dip.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Dani Cook has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Activision Blizzard, Alphabet, Apple, Microsoft, and Netflix. The Motley Fool recommends Nintendo and recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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