Enterprise companies are preparing for a possible recession, with many companies laying off hundreds of employees. On some level, cloud stocks can be somewhat resistant to a recession, although their stocks may be less so. In this piece, we compared two large cap software and cloud stocks. Oracle (NYSE: ORCL) is a fraction of the size of Microsoft (NASDAQ: MSFT), but both have announced layoffs in the last few months. However, Oracle's stock has significantly outperformed Microsoft's over the last month, and a closer analysis reveals why.
Microsoft (MSFT)Microsoft was one of only two losers in the Dow Jones Industrial Average (DJIA) during a red-hot October with record gains for the index, while Oracle was up roughly 28%. Microsoft management warned about slumping computer sales with their most recent earnings report. While the company's Cloud business appears to be solid, its other segments are likely to slow during the expected economic downturn. Thus, a neutral rating appears appropriate at this time.
Historically, Microsoft has been able to weather downturns reasonably well, but the recent warning about computer sales placed last quarter's 14% year-over-year profit decline into context. Computer sales fell nearly 20% year-over-year in the last quarter, which took a bite out of Microsoft's Windows licensing business, although the strength of its Cloud business helped ease some of that pain.
Google Cloud, Amazon Web Services, and Microsoft Azure hold over 75% of the cloud market, and that's unlikely to change anytime soon. Additionally, Microsoft executives recently said gaming is "somewhat resilient" to economic weakness, as demonstrated by Microsoft having its best Xbox console calendar year ever in 2008 during the Global Financial Crisis.
Microsoft's valuation has come down dramatically amid the current bear market, sending its P/E ratio down to around 24x. Between July 2020 and December 2021, Microsoft's trailing P/E ratio was range-bound in the 35x to 40x range. Microsoft's pullback was responsible for a significant chunk of the tech sector's decline over the last week.
The three-year average P/E ratio for the tech sector is 37.5 times, although it's currently trading at around 29x. The software industry as a whole is trading at a P/E ratio of around 48.6x versus its three-year average of 55.1x. Based on all these metrics, Microsoft looks undervalued, but given that a recession appears on tap, it puts everything into perspective.
What is the Price Target for MSFT Stock?Microsoft has a Strong Buy consensus rating based on 25 Buys, three Holds, and zero Sell ratings over the last three months. At $294.85, the average price target for Microsoft implies upside potential of 29.4%.
Oracle (ORCL)Oracle has been performing much better than Microsoft over the last month. Additionally, the company is more of a pure play on cloud and enterprise software, meaning it has fewer areas that could be a drag in a down economy. Further, its valuation is roughly in line with its history despite its Cloud growth. Thus, a bullish rating appears appropriate for Oracle at this time.
When Oracle released its fourth-quarter earnings results in June, it showed a 22% increase in Cloud revenue year-over-year, which boosted its total revenue by 10% year-over-year on a constant-currency basis (5% unadjusted growth). In the most recently completed quarter, Oracle reported a 50% increase in Cloud revenue year-over-year, demonstrating its resiliency at a time when many parts of the economy are starting to struggle.
A Microsoft executive reported recently that customers weren't holding back on cloud purchases despite the industry slowdown. Oracle appears to be enjoying an outsized benefit from this trend since it doesn't have extra businesses that will take a hit during a downturn.
Valuation-wise, Oracle is trading at a trailing P/E ratio of around 36x, displaying solid momentum in light of its Cloud growth. In 2020, during the pandemic, Oracle's P/E was around 15x to 20x. Given the company's steady Cloud growth and its stock's momentum, it looks like there is more upside in the near term.
What is the Price Target for ORCL Stock?Oracle has a Moderate Buy consensus rating based on nine Buy ratings, 12 Hold ratings, and one Sell rating over the last three months. At $88.38, the average price target for Oracle implies upside potential of 15.2%.
Conclusion: Bullish on Oracle, Neutral on MicrosoftIt's extremely difficult to choose between Oracle and Microsoft right now. Both Oracle and Microsoft are dividend stocks, and both are growing. However, Microsoft's heft means slower growth from a much larger base, while Oracle enjoys much faster growth. In short, it could take time for Microsoft to return to its former glory, but Oracle's Cloud business is soaring, potentially providing some upside left in the near term.
After another sell-off following hawkish Fed comments, Microsoft stock (NASDAQ: MSFT) is now down over 33% year-to-date. It's been such a painful fall for the big tech darling that recently delivered cautious guidance for its coming quarter. Despite the selling pressure on MSFT stock, Wall Street analysts are not yet ready to turn on the name. Clearly, they still like what they see underneath the hood. That alone should have the attention of investors on the hunt for a bargain in today's brutal bear market.
Undoubtedly, CEO Satya Nadella is pointing the finger at ominous trends that could easily worsen once the recession arrives. Though Microsoft is a blue-chip heavyweight that's demonstrated resilience while carrying the markets for so long, the company is showing signs that it, too, can be vulnerable to concerns facing almost every other firm in this market.
Very seldom does Microsoft stock sink under its own footing. As macro headwinds continue to weigh, I'd look for Nadella and company to continue to err on the side of caution. Not much is known about the severity of the coming downturn, after all. With a "Fed pause" shot down by Jerome Powell, questions linger as to the Fed's pain tolerance in its battle against inflation.
The market may not be done dealing out punishment to the top tech companies. Still, I stand with the bullish analysts regarding MSFT stock. There's just too much durable growth happening behind the scenes. Even a modest pulling of the brakes is unlikely to derail the firm's longer-term growth prospects.
Microsoft Stock's Post-Earnings Plunge Seems OverdoneMicrosoft's post-earnings reaction was horrific, with the stock tanking 7% out of the gate. The quarterly results were decent, with a modest revenue and earnings beat (up 11% and 4%, respectively) — a big deal, given how many firms have fallen flat this earnings season! Still, downbeat guidance and subpar Azure growth raised red flags for some jittery investors. In the fourth quarter, Azure was a bright spot. Now, it seems like the cloud business is starting to succumb to the headwinds.
Despite downbeat comments and the slowed pace of growth, investors with a longer-term horizon shouldn't conclude that the best growth days are over.
Microsoft has a lot of intriguing projects, most notably in video gaming and the metaverse, that could help it bounce back once the band-aid of a recession is torn off. Indeed, there will be pain over the short to medium-term, but looking further out, it's tough to pass on Microsoft, given its ability to keep its growth rates alive.
The cloud is still Microsoft's most compelling growth engine. Though it may not be as recession resilient as many thought, the digital transformation could easily pick up where it left off once the worst of the economic storm clouds moves past us.
Further, Microsoft is already setting its sights on the metaverse despite the rocky start with its HoloLens headset.
Microsoft: Sights Still Set on the MetaverseThe metaverse went from an exciting trend to a laughable money sink in just under a year. Meta Platforms (NASDAQ: META) has likely dug a deeper hole for itself with its expensive metaverse focus that skeptics may deem as premature. Metaverse headsets are tricky, and the risks of failure can be pretty high. That's why I think Microsoft's partnership with Meta was a smart move.
As Meta rolls the dice with its hardware (and software), Microsoft is fine with opening up its software to the new medium since there's the possibility that the HoloLens may ultimately end up a flop once the metaverse is ready for the masses.
With a new headset in hand, Meta is taking a lot of the risk, while Microsoft stands to benefit on the software side. Though the metaverse may be years off, big tech is eager to continue investing in what could be the biggest jump since the advent of the smartphone.
With Office and Cloud Gaming open to Meta's version of the metaverse, Microsoft has a lot to gain, whether or not Meta holds the keys to the metaverse. Indeed, metaverse software may be more lucrative than hardware, especially given the risks that only a few companies will be able to thrive in the headset market.
As a metaverse software play, Microsoft could be a standout.
What is a Good Buy Price for MSFT Stock?Turning to Wall Street, MSFT stock has a Strong Buy consensus rating based on 25 Buys and three Holds assigned in the past three months. Two of those Strong Buy ratings were given last week.
The average Microsoft price target is $294.85, implying 33.2% upside potential. Analyst price targets range from a low of $234.00 per share to a high of $411.00 per share.
Conclusion: Microsoft Stock Looks Like a Tech Titan on SaleMicrosoft may not be immune to a recession, but it will likely be ready to deliver next-level growth once markets shift to recovery mode. At 23.1 times trailing earnings, MSFT stock looks like a quality tech titan on sale.