Motley Fool: Huge and getting huger

Tech giant Microsoft (Nasdaq: MSFT) did not escape last year’s tech stock sell-off; its shares were recently 20% below their 52-week high. There’s plenty of reason to expect the stock to recover and increase in value over the long run.

For starters, it’s diverse, with divisions covering software and hardware as well as business and consumer products and services, but no single category makes up more than 50% of its business. Microsoft’s largest division, server products and cloud services, is also growing the fastest – its revenue was up 20% year over year in the quarter ending in December. That division contains Microsoft’s Azure cloud infrastructure and platform services, which grew by 31%.

Microsoft groups its businesses into three large categories: productivity and business processes, intelligent cloud and more personal computing. Even during the second quarter’s down cycle in consumer and PC sales, Microsoft had profits in all three categories.

Microsoft’s varied profit streams make it an incredibly resilient business. Diversified, rising profits also allow Microsoft to invest in new and exciting innovations such as ChatGPT parent OpenAI, all while returning cash to shareholders via dividends and share repurchases. (The Motley Fool owns shares of and has recommended Microsoft.)

Ask the Fool

Q. Is a company with a $75 stock price bigger and financially healthier than one with a $25 stock price? – S.K., Midland, Michigan

A. Not necessarily. A stock price alone doesn’t tell you very much. You need more information, such as how many shares there are: If the first company has just 1 million shares, its value would be $75 million, while if the second company has 1 billion shares, it would be valued at $25 billion. Another useful measure might be how much income the company has been earning per share.

To get a sense of a company’s financial health, check its financial statements, such as its balance sheet and income statement. You can see, for example, how much cash and debt it has and how quickly its revenue and earnings are growing.

A company with slowing sales and rising debt is not likely to be attractive at any price. Instead, a promising investment would be growing briskly, widening its profit margins and gaining market share – all while seeming to be undervalued by other investors. That’s true no matter what its share price.

Remember: A $2 stock can really be “worth” only $0.10 per share, while a $500 stock might be worth $1,000 – and be headed there, too.

Q. What’s an “orphan drug”? – A.H., Greenville, North Carolina

A. It’s a drug developed to treat a rare disease or condition – one that affects fewer than 200,000 people in the United States.

As you might imagine, pharmaceutical companies are unlikely to pursue treatments for such conditions without millions of customers helping them recoup their development costs. That’s why the Orphan Drug Act of 1983 was passed, to provide them financial incentives to do so.

My dumbest investment

My worst investment move was buying shares of iClick Interactive Asia Group. I read a small story suggesting it was working with Facebook. That sounded good. I bought my shares for a little less than $18 apiece – but I think the company’s stock is now less than $0.60 per share! – J.C.S., online

The Fool responds: Shares of iClick were recently trading near $3.60 apiece – but that’s largely due to a 1:10 reverse split that occurred in November 2022. Regular splits feature a larger number followed by a smaller one: A 3:1 split, for example, will give you three shares for each share you own, while reducing the share price proportionately, so that the total value of your holding is just about the same. A 1:10 reverse split, though, leaves you with one share for every 10 you own while boosting the share price tenfold and leaving the overall value of your holding intact. Companies often execute reverse splits to prop up their share prices, to avoid being delisted from a stock exchange due to an alarmingly low stock price.

iClick’s history includes other red flags, such as a secondary offering of additional shares of stock in 2020 that diluted the value of existing shares. In addition, it’s a Chinese company; international stocks are subject to political and currency headwinds, among other risks, and often have fewer regulatory requirements than U.S. stocks.