To The Moon

• We think Microsoft is a defensive tech stock, given its solid profitability and free cash flows.
• Furthermore, the company has multiple growth levers to pull with a well-diversified business model.
• We discuss why tech investors should add MSFT stock.

Investment Thesis

Microsoft Corporation$Microsoft(MSFT)$ is one of the core tech holdings in our portfolio. The company has transformed itself since CEO Satya Nadella took over the reins. The tech behemoth continues to drive growth across the SaaS space. Furthermore, its momentum has also been underpinned by the strength of its Azure IaaS. It has allowed the company to continue shifting its customers' legacy workloads and applications to the cloud. Furthermore, it has exposure to multiple software themes across productivity, automation, cybersecurity, data analytics, CRM, ERP, gaming, and the metaverse. Moreover, it also has a cloud communications segment that has grown rapidly.

Therefore, we believe investors can leverage the company's well-diversified tech business model by buying MSFT stock. Moreover, the company commingles growth and profitability very well. We discuss why MSFT stock should be an anchor stock for tech investors. We also share why MSFT stock is a Buy now.

MSFT Stock Key Metrics

Microsoft stock has a strong, unmistakable long-term uptrend over time. Therefore, it has proven to be a solid stock for tech investors to hold as an anchor stock. In addition, MSFT investors have benefited from the market's confidence in its resilient business model.

Nevertheless, MSFT stock also suffered during the recent tech bear market. It has fallen more than 15% from its November highs. Admittedly, it was a steep drop for the SaaS monolith. However, its "high-growth" but unprofitable/less profitable peers were battered even more dramatically (which we discussed in a recent article). But, such a steep correction has also created a fantastic opportunity for long-term investors. MSFT stock's NTM EBIT multiple of 24.2x has reverted closer to its 5Y mean of 22.2x. Furthermore, its NTM FCF yield seems more attractive now at 3.2% (5Y mean: 3.9%).

Furthermore, its consensus price targets ((PTs)) also look constructive. We can observe its most conservative PTs have consistently supported Microsoft stock's price over the last three years. The stock is currently trading markedly below its most conservative PTs. Our fair value estimates also suggest that MSFT stock seems reasonably valued (+/- 10% from fair value).

Is Microsoft Stock Worth Buying?

Keen tech investors should understand Microsoft's well-diversified business model well. The company operates three solidly profitable segments that have continued to support its robust growth. Even its legacy More Personal Computing segment has grown respectably as Microsoft sees a revival in PC. As a result, it has helped Microsoft turn the flywheel in its other productivity suite as its users continue their journey on Windows. CFO Amy Hood highlighted (edited): "There are more PCs per household and more time being spent on PCs. We're continuing to see that even with hybrid work. Windows 11, I think, is a great investment in having a modern and beautiful user experience for Windows. We're seeing a good response to it."

Chief Product Officer Panos Panay also penned an insightful piece in January highlighting the momentum in Windows 11. He articulated (edited):

• Windows 11 is a catalyst for engagement and growth. We have seen strong demand and preference for Windows 11 with people accepting the upgrade offer to Windows 11 at twice the rate we saw for Windows 10.
• Windows 11 also has the highest quality scores and product satisfaction of any version of Windows we’ve ever shipped. Windows 11 is driving increased engagement with people spending 40% more time on their Windows 11 PC vs Windows 10.
• The multitasking and productivity advantages of the Windows PC are being used more than ever with nearly half of Windows 11 users using the new Snap Layouts. - Microsoft

We have also explained Microsoft's momentum in cloud computing and cybersecurity. Even though AWS (AMZN) continues to be the #1 hyperscaler, Azure has garnered strong momentum in hybrid and multicloud. Furthermore, its SaaS advantage has also given Microsoft tremendous leverage to integrate new productivity tools and automation software in-house. Such integration has also been highly beneficial for its operating margins seen above in its Intelligence Cloud segment.

Nonetheless, Google Cloud$Alphabet(GOOG)$ has also been aggressive lately in the cybersecurity space. It successfully acquired Mandiant$Mandiant(MNDT)$ to strengthen its cybersecurity architecture, leveraging Mandiant's MDR capabilities. Microsoft was also rumored to have expressed interest in the deal. However, Google Cloud probably still needs to acquire a leading EDR partner to level up its XDR offering. In contrast, Microsoft already has a highly advanced cybersecurity solution, worth $15B, up 45% YoY.

Is MSFT Stock A Buy, Sell, Or Hold?

We believe that long-term investors should consider the opportunity to add MSFT stock after its recent correction. The stock is so strong and well supported that it didn't enter a bear market, even though the Invesco QQQ ETF$Invesco QQQ Trust(QQQ)$ briefly entered one.

Furthermore, we are confident that Microsoft continues to look very well-positioned moving forward. It has many secular drivers undergirding its opportunities as well. Moreover, its robust profitability and free cash flows will continue to offer investors a defensive posture in the face of higher inflation and interest rates.

Consequently, we reiterate our Buy rating on MSFT stock. Do you want to buy only at the right entry points for your growth stocks?