Nasdaq Correction: Tech Stocks Like Microsoft Remain Strong

Following a steep decline, the Nasdaq Composite has dropped over 13% from its all-time high reached in December, officially marking a correction, defined as a drop of at least 10%. The tech-focused index fell by 4% on Monday, continuing its downtrend on Tuesday amidst a broader market sell-off. As it stands, the technology sector is down more than 10% year to date. Notable tech giants Microsoft (NASDAQ: MSFT) and Apple reported declines of 10% and 12%, respectively, while Nvidia has seen a significant 19% drop in the same timeframe.

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Here‘s why Microsoft is a particularly compelling growth stock to consider now.

Image source: Getty Images.

Challenges in Investment During Market Sell-offs

Investing during a rapid sell-off can be daunting, especially with the Nasdaq’s 12% decline in the past month highlighting the swift downturn. Investors often feel compelled to purchase shares of companies with sharply reduced prices, yet a more prudent approach is to focus on stocks with long-term potential that you can hold through further market fluctuations.

While getting a bargain on shares from a strong company is appealing, trying to time the market by catching the lowest point is generally unwise. History supports the notion that investing in solid companies at lower valuation points tends to yield better outcomes than investing in weaker firms at inflated prices. The wisdom expressed by Warren Buffett resonates here: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Not every stock experiencing a sell-off represents a solid investment. A few companies may have seen their shares become overvalued, while others, like Microsoft, still present strong investment opportunities.

Microsoft: A Strong Player at a Reasonable Valuation

Currently, Microsoft holds a price-to-earnings (P/E) ratio of 30, which is lower than its 10-year median P/E of 32.5. This indicates that the market places Microsoft below its historical average valuation, despite the significant evolution of its business in the past decade.

As one of the most diversified tech stocks available, Microsoft has a stake in various sectors including hardware, software through the Microsoft 365 suite, Teams, and platforms like LinkedIn and GitHub, along with significant cloud services via the Microsoft Intelligent Cloud and Azure. The company is investing heavily in artificial intelligence (AI) to enhance its existing platforms and develop advanced services for cloud clients. Microsoft’s healthy cash flow and robust balance sheet—which holds more cash and short-term investments than long-term debt—positions it well to sustain these capital expenditures.

In essence, buying Microsoft stock offers a means to invest across several key technological segments while leveraging a financially stable company that can withstand market cycles.

Microsoft’s Diverse Revenue Streams

Another strength of Microsoft lies in its ability to deliver revenue growth across various segments along with margin expansion. Its latest earnings report for the second quarter of fiscal 2025 showcased significant improvements when compared to the first halves of the previous two fiscal years.

Segment Metric	1H Fiscal 2023	1H Fiscal 2024	1H Fiscal 2025
Productivity and business processes revenue (billions)	$44.68	$51.08	$57.75
Productivity and business processes operating margin	52.4%	56.4%	57.8%
Intelligent cloud revenue (billions)	$34.81	$41.54	$49.64
Intelligent cloud operating margin	38.7%	44.4%	43%
More personal computing revenue (billions)	$23.38	$25.92	$27.83
More personal computing operating margin	21.5%	25.7%	26.8%

Data source: Microsoft.

Microsoft’s AI initiatives have notably benefited margins in all business areas. It’s significant to observe how quickly the cloud segment has grown, nearly matching the productivity and business processes group that encompasses Microsoft 365, Windows, Teams, and various commercial software products.

Potential Risks Ahead for Microsoft

Market declines invite investors to reassess their motivations for owning a stock, revisiting their investment assumptions, and identifying any risks present. Microsoft stands out as a robust business with impressive growth, a diverse model, strong financials, consistent dividends, and sufficient free cash flow to facilitate stock repurchases. Their competitive advantages are substantial.

However, risks remain, primarily stemming from their heavy investments in AI. Microsoft’s ambitious plans to allocate $80 billion towards AI data centers and cloud applications in fiscal 2025 pose considerable challenges—even for a company of its stature. This strategy has already led to reductions in stock repurchases to support these initiatives.

Purchasing Microsoft stock at this juncture hinges on the assumption that its AI investments will yield significant returns, justifying the price tag. A downturn in the market could impact these growth strategies.