Why Microsoft’s earnings disappointment signals an investment opportunity

Microsoft (MSFT 1.57%) missed on both revenue and profit in its fourth quarter of fiscal 2022. The disappointing news, which the company announced after Tuesday’s close, appeared to confirm the negative segment that has weighed on the tech sector since the end of last year.

But Microsoft shares rose 5% on Wednesday, trading on a more optimistic outlook. The factors underlying this market reaction could cause investors to consider adding shares of Microsoft to their portfolios — and possibly some of its peers as well.

Microsoft revenue

It was a rare miss for the company. Microsoft’s revenue rose 12% to $51.9 billion in its fourth fiscal quarter, which ended June 30. Wall Street expected $500 million more.

In particular, the strong dollar had a negative effect on its international revenues – at constant exchange rates, revenue growth was 16%. Similarly, net income rose only 2% to $16.7 billion, below expectations by about 3%. A 17% increase in the cost of sales and a 20% increase in research and development costs had a dramatic impact on the bottom line.

However, in the fiscal 2023 guidance that management provided on the earnings call, it projected double-digit percentage growth in revenue and earnings in both constant currency and U.S. dollars.

The impact of income

This more positive outlook appeared to negate the impact of lost earnings and revenue, explaining why the stock rose after the report.

The report and guidance also underscores the continued strength of non-consumer technology. Despite weak sales overall, Microsoft’s Azure revenue grew 40% and intelligent cloud remained the company’s largest and fastest growing segment. Additionally, cloud services tend to be cost-effective options for the businesses that use them. So even if the economy slides into a recession, the cloud segment is likely to shield Microsoft from the impact of lower consumer spending.

Amid this bear market, Microsoft is trading at a price-earnings ratio of 28, a near two-year low. Although not the cheapest cloud stock, it is vastly undervalued compared to its cloud rival Amazonwhich trades for 57 times earnings.

Additionally, the movement in Microsoft’s share price on Wednesday could signal positivity and improving investor outlook for the tech sector in general. Market leaders tend to be the last to fall in a downturn and the first to recover. The fact that Microsoft gained ground despite the quarterly failure may indicate that the slide in the technology sector is about to bottom. This could give hope to investors who have seen the Nasdaq Composite Index fall over 23% and many growth tech stocks fall over 80% in a brutal year for the overall market.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. will heal has no position in the stocks mentioned. The Motley Fool holds positions and recommends Amazon and Microsoft. The Motley Fool has a disclosure policy.

About Troy McMiller

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