microsoft (MSFT -3.86%) missed both revenue and profit in the fourth quarter of 2022. The disappointing news the company announced after the close of trading on Tuesday appeared to confirm the negative segment that has weighed on the tech sector since the end of last year.
But Microsoft’s shares rose 5% on Wednesday, trading on an optimistic outlook. Factors underlying the market reaction could make it a smart time for investors to consider adding Microsoft stock to their portfolios.
Microsoft earnings
It was a rare mistake for the company. Microsoft’s revenue rose 12% to $51.9 billion in the fourth quarter that ended June 30. Wall Street expected another $500 million.
In particular, the strong dollar had a negative impact on international earnings. Revenue growth on a constant currency basis was 16%. Similarly, net income was up just 2% to $16.7 billion, about 3% below expectations. A 17% increase in revenue costs and a 20% increase in R&D costs had a dramatic impact on net income.
However, the guidance provided by management during the earnings call for fiscal 2023 projects double-digit revenue and earnings growth in both constant currency and the U.S. dollar.
Revenue impact
That more positive outlook appears to offset the impact of earnings and earnings misses, explaining why the stock has risen following the report.
The report and guidance also show continued strength in non-consumer technology. Despite the overall sales slump, Microsoft’s Azure revenue increased by 40%, and the intelligent cloud remained the company’s largest and fastest-growing segment. Additionally, cloud services tend to be a cost-saving option for businesses that use them. So even if the economy were to hit a recession, the cloud segment could shield Microsoft from the impact of declining consumer spending.
In this bear market, Microsoft is trading at 28 times earnings, its lowest level in two years.Not the cheapest cloud stock, but far undervalued compared to cloud rivals Amazonwhich trades at 57x earnings.
Additionally, Wednesday’s move in Microsoft’s stock price may signal a positive attitude and improved investor outlook for the technology sector in general. Market leaders tend to be the last to dip in recessions and the first to recover. Microsoft’s dominance despite missing quarterly results could indicate that the downturn in the tech sector is nearing a bottom. This could give hope to investors we’ve seen so far. NASDAQ Composite Index Stocks are down more than 23%, with many growth tech stocks down 80% or more in a tough year for the market as a whole.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Will Healy has no positions in any of the stocks mentioned. The Motley Fool invests in and recommends Amazon and Microsoft. The Motley Fool’s U.S. headquarters has a disclosure policy.
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