Here's Why We Are Waiting To Double Down On Microsoft

May 26, 2022 8:37 AM ETMicrosoft Corporation (MSFT)21 Comments22 Likes


  • We have a stake in Microsoft and we love many things about the company.
  • We believe there is a long runway for growth for the company, and Microsoft is expanding to many software verticals through acquisitions.
  • For two major reasons, we believe now is not the right time for us to boost our stake in the company.
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View of Microsoft building headquaters in Cologne, Germany.

Lobro78/iStock Editorial via Getty Images

This article was prepared by Lasan Devasirinarayana in collaboration with Dilantha De Silva.

We don't try to time the market but when it comes to doubling down on our existing holdings, we always look for a wide margin of safety. With stocks continuing to remain under pressure due to both macroeconomic and geopolitical reasons, many of the stocks we own at Leads From Gurus have witnessed a dramatic decline in market value this year. Microsoft Corporation (NASDAQ:MSFT), which is part of our model dividend portfolio, has not been an exception. We invested in MSFT stock early last year when the stock was trading around $220, and the 22% decline in the stock price this year has made us question whether now is the time to double down on Microsoft. Our findings, which are discussed in this analysis, suggest there could be a better opportunity to invest in Microsoft in the coming months. Before we move on to discuss our findings, let us reiterate that our intention is not to time the market but to make rational asset allocation decisions. If Microsoft stock takes off from here contrary to our expectations, we would not be complaining as we already have a stake in the company.

Microsoft's recent earnings and our projections

Microsoft had a remarkable third quarter to the Fiscal Year 2022, despite headwinds on the macroeconomic front in the form of the Russia - Ukraine conflict, rising inflation, and supply chain constraints to name a few. The revenue was primarily driven by the Intelligent Cloud segment, with Azure and other cloud services revenue growing 46% YoY. Server products and other cloud services grew 29% YoY to push the segment results up by 26% YoY to report $19.1 billion in revenue, contributing 39% to the total revenue in Q3 FY22.

Azure, being the market leader for customers’ SAP workloads in the cloud, has successfully secured more strategic and larger commitments from leaders across all industries. Microsoft claims that the number of $100 million-plus deals more than doubled during the quarter compared to the respective quarter a year ago.

With the active contribution of 31 million Visual Studio users, in addition to the increasing usage of GitHub by not just independent developers and startups but also 90% of Fortune 100 companies, we believe the Intelligent Cloud segment will report a steady 23% YoY growth in revenue to $21.3 billion in Q4 FY22, pushing the FY 2022 segment revenue to $75.6 billion. Meanwhile, the recently acquired Nuance Communications will report its results under Microsoft for the first full quarter in Q4 FY22, which should positively impact the overall performance of the company.

The productivity and Business Processes segment, which currently reaps the highest EBIT margins for the company at 45.5% in Q3 FY22, saw revenue growth of 16.5% in the recent quarter. Better-than-expected revenue across Office 365 (17% YoY), LinkedIn (34% YoY), and Office Consumer (11% YoY) netted off the negative impact from incremental forex, open licensing transitions, and lower-than-expected results in Dynamics.

LinkedIn continued to keep the foot on the gas pedal, reporting the highest growth among the sub-sectors for the quarter, on the back of over 830 million professionals using the platform to connect, learn, grow, and get hired, while the continuously improving tools aided the dynamic labor market to discover potential career opportunities 88% more compared to the previous year. Thus, Talent Solutions topline recorded a 43% YoY growth.

More Personal Computing segment, despite reporting overall revenue growth of 11.4% YoY to $14.5 billion in Q3 FY22, continues to battle heavy competition in the Gaming and Devices front. However, with the $68.7 billion acquisition of Activision Blizzard (ATVI), which is expected to be finalized by mid-2023, we expect the gaming segment to turnaround subsequently. Microsoft claims that the $200 billion gaming industry is the fastest-growing form of entertainment in the world and expects 4.5 billion people around the world to play games by 2030 (150% cumulative growth from 2022).

Devices, on the other hand, face severe competition from Apple, Inc. (AAPL) and Alphabet, Inc. (GOOG) (GOOGL) with Apple taking a large chunk of the tablet market share. Meanwhile, Google, with its attractive pricing strategies, is effectively paving the way for Android-run tablets to gain popularity.

Exhibit 1: Q3 FY22 key metrics

Microsoft Q3 FY22 key metrics

Earnings release

Source: Earnings release

Microsoft generally records higher revenues in the second and fourth quarters of its fiscal year. End-of-the-year spending trends by corporates in their major markets and holiday season spending by consumers drive Microsoft’s second-quarter results, while fourth-quarter performance is driven by the volume of multi-year on-premises contracts executed during the period. However, during this fiscal year, we believe the fourth quarter, similar to the previous quarters, will be slightly affected by macroeconomic headwinds, limiting the ability of both retail consumers and companies to increase their spending on software products that are not essential.

Based on the above expectation, we forecast Q4 FY 2022 revenue to grow 15.1% YoY to report $53.1 billion, with a 40% contribution from the Intelligent Cloud segment, driven by Azure’s promising strength in the cloud computing market. We forecast the Productivity and Business Processes segment and More Personal Computing segment to grow 15% YoY and 6% YoY, respectively, in the final quarter, pushing the 2022 Fiscal year consolidated revenue to $199.5 billion (+18.7% YoY).

Exhibit 2: Revenue by segment (actuals and estimates)

Microsoft Revenue by segment (actuals and estimates)

Company filings and author's estimates

MSFT’s gross profit saw YoY growth of 18% to $33.7 billion in Q3 FY22, however, with compromises on its gross margins on the back of the strengthening U.S. dollar.

In line with the constant expansion of the company, the headcount increased by 20% compared to the previous year in the last quarter, primarily due to new hires in cloud engineering, customer deployment, LinkedIn, and sales, in addition to the inclusion of Nuance’s workforce. Nonetheless, the operating income recorded a growth of 19% YoY to $20.4 billion, while the operating margins improved slightly to 41%. These are very good signs for investors, in our opinion, as it exhibits the company’s ability to scale profitably despite its massive size.

Microsoft has acquired over 50 companies in the last five years and continues to expand its footprint across the global software spectrum. The company has spent more than $20 billion so far into the fiscal year, which is almost 1.5 times the cash spent on acquisitions in the same period last year. Microsoft, by all means, is continuing to be ambitious, which is one of the main reasons why we find value in the company.

Our concerns

While we remain positive about the revenue and profitability potential of the company, we are not sure whether this is the right price to boost our stake in the company. There are two main concerns for us.

First, we believe Microsoft stock has outperformed many of its large-cap peers this year primarily because of the strength of its stock buyback program. The board of directors has approved a stock repurchase program to the tune of $60 billion and the company repurchased shares worth $8.8 billion in Q3 FY22, and $24 billion in the first nine months of the current fiscal year. We are concerned if this program is artificially inflating the price of the stock in the short run. Furthermore, we are of the view that the company is incurring a considerable opportunity cost due to this practice, where it is spending cash that could rather be used in higher return generating long-term investments.

Second, we are of the view that earnings surprises in the next few quarters might weigh on the negative side due to macroeconomic uncertainties such as the touted possibility of a recession, inflationary pressure on consumers and businesses, and the geopolitical uncertainty in Europe.


We love many things about Microsoft, which is why we remain invested in the company. That being said, we believe this is not the right price for us to double down on Microsoft stock. We believe there is a long runway for growth for the company, and we would love to see the company aggressively pursue the growth opportunities available in many of the markets it serves.

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This article was written by

Dilantha De Silva profile picture
Actionable ideas and model portfolios to beat the market

I am an investment analyst with 7 years of experience in financial markets. I specialize in U.S. equities and incorporate a top-down approach to identify developing macro-level trends and the companies that would benefit from such trends. I am a strong believer that the best investment opportunities could be found in under-covered equities. Please click the "Follow" button to get timely updates on new articles.

I am the founder of Leads From Gurus, a Marketplace service on Seeking Alpha that focuses on uncovering alpha-generating opportunities.

I currently work with leading financial publications including Refinitiv, Seeking Alpha, ValueWalk, and GuruFocus.

I'm a CFA level 3 candidate, an Associate Member of the Chartered Institute for Securities and Investment (CISI, UK), and a candidate in the Chartered Wealth Manager program.

During my free time, I enjoy reading.


Disclosure: I/we have a beneficial long position in the shares of MSFT either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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