The Nasdaq Composite index, known particularly for its focus on technology stocks, is currently in a correction phase. This situation arises when a market experiences a decline of 10% or more from its peak.
For investors considering whether to “buy the dip,” it’s a tricky call. The recent downturn might escalate into a more severe, protracted bear market. Nonetheless, history shows that most 10% corrections tend to resolve relatively quickly. They often provide a good opportunity for investors to acquire shares in high-quality companies with an eye towards the long term.
This context suggests that investors looking to bolster their portfolios could benefit from considering stocks from the esteemed “Magnificent Seven.” These industry giants have seen declines alongside the market, making this a potentially strategic time to invest. Among these stellar options, one particularly robust company stands out as a prime candidate.
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In the past decade, the Nasdaq has experienced corrections six times, averaging one every 1.67 years. This statistic should reassure investors that corrections are a common and possibly healthy aspect of market dynamics.
However, corrections occasionally give way to full-blown bear markets, characterized by drops of over 20% and a longer duration. It’s currently uncertain if the market’s recent slide signifies a more severe downturn. We might not get a clearer picture until the forthcoming changes in trade policies, such as the tariffs, are fully implemented and their impact can be assessed. Despite these uncertainties, it remains crucial for investors to focus on acquiring “safe” stocks—those which have weathered the storm and could endure a recession if it materializes. This context makes one of the “Magnificent Seven” especially appealing right now.
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Now, is Microsoft poised for a resurgence? As the world’s second-largest company, Microsoft has become a cornerstone in tech portfolios, but there’s still room for it to excel. The company is deeply involved in the competitive field of artificial intelligence (AI). With significant investments required in the race for artificial general intelligence (AGI), Microsoft, like its peers, has the potential to grow even more influential over the next decade. Despite concerns that these tech giants might succumb to the “law of large numbers,” they have continuously innovated, achieving impressive profit growth in recent years.
Moreover, Microsoft’s strong financial standing provides further confidence. It holds over $71.6 billion in cash against $45 billion in debt, and has already generated $26 billion in free cash flow in just the first half of its fiscal year ending in December.
It’s one of only two companies boasting a AAA credit rating—surpassing even the U.S. government’s.
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Now, let’s explore the catalysts for Microsoft’s potential growth. First up is the concept of performance reversion to the mean. Since Satya Nadella became CEO in 2014, Microsoft has outperformed the market broadly. But recently, its performance has lagged behind some of its peers. In fact, over the past year, the stock is down 8.2%—the only negative return among the “Magnificent Seven.”
Yet, this underperformance isn’t a reflection of any issues within Microsoft’s operations. Last quarter, the company’s revenue rose by a strong 12%, and operating profit increased by 17% due to expanding margins.
As the stock currently trades at 31.5 times trailing earnings, which is on the lower end compared to its five-year history, it could soon shift into a phase of renewed outperformance.
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Another catalyst is Microsoft’s pricing strategy, particularly the recent hike. As AI becomes increasingly integrated into Microsoft’s offerings, revenue boosts are anticipated thanks to a price hike on its Microsoft 365 consumer subscriptions. This increase—43% in fact—means users will pay $9.99 per month or $99.99 annually, a jump from previous rates of $6.99 monthly or $69.99 annually.
This price rise, which funds the integration of AI features into the 365 suite, may seem hefty but marks the first increase in 12 years.
Investors are advised to have realistic expectations, as the 365 consumer segment represents about 3% of Microsoft’s total revenue. However, the commercial 365 segment accounts for a more substantial 31%. Recent price adjustments in this area were more modest, but if further increases occur, particularly with the integration of AI, it could significantly impact Microsoft’s financial outcomes.
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A final catalyst involves cutting AI costs. Microsoft has been heavily investing in AI technology, specifically in chips from Nvidia. It was reported that Microsoft purchased 485,000 Nvidia Hopper GPUs, making it the largest buyer of Nvidia during that period.
Despite these expenses, Microsoft stands to save substantially as it scales its in-house AI chip program—potentially driving down future costs significantly.
Microsoft has already started deploying its own Maia AI chips. CEO Satya Nadella mentioned last year that by mid-year, Microsoft’s chip constraints could be alleviated, suggesting that their next-gen in-house chip program could lead to notable savings and improved margins starting around mid-2025.
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Putting it all together, Microsoft’s recent underperformance, combined with a relatively lower valuation and strategic business decisions, positions it well for growth. Despite the broader economic uncertainties, Microsoft’s exceptional resilience and strategic initiatives make it an attractive long-term investment option right now.
