It hasn’t been a great start to 2022. Share prices have generally declined, particularly in the US. I wouldn’t say there’s been a stock market crash just yet, but it might well happen. Although times like these are difficult for investors like myself, I try to see volatile markets as an opportunity. After all, if the companies are trading well, I could snap up some bargains when share prices fall.
Here’s a company I’ve got my eye on if stock markets do crash.
The investment case
The company is Microsoft (NASDAQ: MSFT), the software giant that’s listed in the US. Its products are used globally in most homes and businesses, which I think brings a considerable competitive advantage. For example, its Office suite of software is crucial for many companies, and it’s typical for job applications to list it as a required skill. Not many other software companies can boast that their products are so important for businesses.
Microsoft’s competitive advantage makes it a quality stock, in my view. It shows in the excellent financial metrics the business achieves. For example, in its fiscal year 2021 (the 12 months to 30 June 2021), it generated a huge operating margin of 42%. What’s even better is that this has increased every year since 2016 (when it was 30%).
One further exciting aspect of Microsoft’s business is the growth in its cloud services. A major part of this is Microsoft Azure, the company’s cloud computing platform that’s used for advanced analytics, storage and networking. In the most recent second-quarter earnings results for the fiscal year 2022, Azure and other cloud services revenue grew by an impressive 46%. I think this is an attractive growth market for Microsoft.
Risks to consider
The US government has concerns over the power of ‘Big Tech’ — the mega-cap technology companies. This presents a risk of tighter regulation for Microsoft, and may therefore stifle its growth plans. For example, the Federal Trade Commission was looking into unreported acquisitions of technology companies, which included Microsoft in its investigation.
Also this month, Microsoft announced it was acquiring Activision Blizzard. Any acquisition comes with risk as there’s no guarantee the two companies will integrate well together. This one in particular will be Microsoft’s biggest acquisition ever, at a value of $68.7bn. I do see this as a good move by Microsoft. However, I still need to monitor how the acquisition progresses given the issues that Activision Blizzard has been dealing with.
A stock market crash could be the opportunity
I view Microsoft as a quality company. But the valuation today is putting me off buying the shares. This is where a stock market crash comes in. I could buy the stock much cheaper if this happens.
As it stands today, the stock is valued on a price-to-earnings (P/E) ratio of 32. I think this is high compared to the historical valuation. For example, the average 10-year P/E ratio has been 23. I’d have to pay quite a premium today to buy it.
On balance, I’m keeping Microsoft at the top of my watchlist, but not buying yet. If there’s a stock market crash, however, I’d snap up some shares for my portfolio.
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Dan Appleby has no position in any of the shares mentioned. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Microsoft. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
