It's been hard to ignore that artificial intelligence is a hot topic the last few months.

The generative engine ChatGPT opened in November and has quickly caught the imagination of the public.

There is even talk that Microsoft Corp (NASDAQ: MSFT), which is a major investor in the startup behind ChatGPT, could challenge Alphabet Inc (NASDAQ: GOOGL)'s two-decade domination of internet searches by injecting AI into Bing.

Already "a veritable rainforest of new AI startups is being freshly funded", according to Frazis Capital Partners portfolio manager Michael Frazis.

"While it won't be clear for some time which will win and which will fall…, one thing is certain: they will all [need] immense amounts of computing power," he said in a memo to clients.

"Power that, absent this revolution, may not have been required for many years."

As such, some investors are looking to gain exposure to companies involved in manufacturing computer chips or, their key ingredient, semiconductors.

The best semiconductor stocks in the world

Shaw and Partners portfolio manager James Gerrish was recently asked which are the best ASX shares of businesses involved in the semiconductor industry.

"When I think semiconductors, my first thoughts are international companies such as Qualcomm Inc (NASDAQ: QCOM), NVIDIA Corporation (NASDAQ: NVDA), Texas Instruments Incorporated (NASDAQ: TXN), Broadcom Inc (NASDAQ: AVGO), Intel Corporation (NASDAQ: INTC), Taiwan Semiconductors Mfg Co Ltd (NYSE: TSM), Samsung Electronics Co Ltd (KRX: 005930), etc," he said in a Market Matters Q&A.

"Unfortunately there are no companies of this magnitude on the ASX."

So Gerrish suggested the next best option could be exchange-traded funds. But again, they are overseas shares.

"Two of our preferred ETFs to gain exposure to the semiconductor markets are the iShares Semiconductor ETF (NASDAQ: SOXX) and the VanEck Semiconductors ETF (NASDAQ: SMH)," he said.

"Locally, at this stage, there aren't any companies on the Market Matters radar."

Frazis took the example of Nvidia to demonstrate how critical computer chips are to power an AI-driven future.

"Nvidia is partnering with Mercedes Benz Group AG (ETR: MBG) to power their next generation of cars from 2024, including level 4 autonomy, over-the-air updates, and best-in-class safety and convenience applications," he said.

"Nvidia is a small position for us, bought at lower prices, but their 81% market share in AI processing is now more relevant than ever."

The post What are the best ASX shares to buy for semiconductor exposure? appeared first on The Motley Fool Australia.

There are many exchange-traded funds (ETFs) to choose from on the ASX, both active and passive.

Although the funds themselves are traded on the ASX, many of these contain overseas stocks.

The situation then gets complicated because the buying and selling price for these shares becomes dependent on the exchange rate of the Australian dollar.

Some ETF providers have provided a solution around this by providing currency-hedged funds.

Hedged funds will use financial instruments to smooth out the effects of any exchange rate fluctuations over time.

So when should you buy into a currency-hedged ETF, and when should you go for the unhedged ETF?

Shaw and Partners portfolio manager James Gerrish gave his thoughts recently on this dilemma:

The Australian dollar is a risk currency

Gerrish took the example of Betashares Nasdaq 100 ETF (ASX: NDQ) and BetaShares NASDAQ 100 ETF-Currency Hedged (ASX: HNDQ).

"These are ASX listed ETFs yet they are holding US assets such as Microsoft Corp (NASDAQ: MSFT), Apple Inc (NASDAQ: AAPL) and Amazon.com Inc (NASDAQ: AMZN)," he said on a Market Matters Q&A.

"NDQ is not hedged whereas the HNDQ ETF is currency hedged."

He explained that if the NASDAQ-100 (NASDAQ: NDX) rises by 10%, HNDQ is designed to do the same.

"NDQ is also exposed to the vagaries of the Australian dollar," said Gerrish.

"If the Aussie falls by 10% your gains on the underlying stock could be wiped away and, of course, vice versa."

The conventional wisdom is to buy the hedged ETF when the Australian dollar is low, and buy the unhedged version when the Aussie is high against other currencies.

However, Gerrish's insight is that the difference is not as significant as one might think.

"Unhedged exposures generally have a smoothing effect on returns for Australian investors given the Australian dollar is a risk currency," he said.

"When markets fall, the Australian dollar generally falls as well, cushioning the decline."

Over the past year, NDQ has fallen 11.5% while the currency-hedged HNDQ has lost 17%.

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Most ASX technology shares have admittedly suffered in recent times, but it's been next-level painful to own Appen Ltd (ASX: APX).

Not even long-term buy-and-hold investors have avoided the anguish. Over the past five years, the share price for the artificial intelligence service provider has crashed almost 70%.

The COVID-19 pandemic, loss of clientele, and financial downgrades have not helped the cause.

However, there's been a ray of hope the last eight weeks, as the stock has rallied 16.2% since 20 December.

Last week alone Appen shares climbed 29% at one stage, before settling back down on Monday.

So what's going on?

No news is good news

Shaw and Partners portfolio manager James Gerrish, on a Market Matters Q&A, had a theory as to why investors are piling onto Appen.

"There is no specific news but the unveiling of ChatGPT has put AI back in the spotlight with Appen providing the data which underpins the [industry's] evolution."

ChatGPT is the generative artificial intelligence chatbot that's been grabbing headlines. The startup behind the technology is heavily backed by Microsoft Corp (NASDAQ: MSFT).

The AI engine outputs results of sufficient quality that schools and universities have sought to ban it for fear of plagiarism.

According to Reuters, ChatGPT reached 100 million monthly active users in January, which was only two months after its public release.

The rapid popularity is unprecedented. TikTok took nine months to reach 100 million users, while Instagram had to wait 2.5 years.

Appen provides human training for artificial intelligence engines, so the hype around the industry could be having a halo effect on its share price.

A secondary impact, according to Gerrish, is that the short sellers have been forced to sell to cover their positions.

"I can certainly imagine that nobody wants to short anymore after the stock's dramatic fall from grace."

Despite the newfound popularity among investors, the professionals are far from convinced about Appen.

According to CMC Markets, two of the five analysts covering the stock rate it as a strong sell. The remaining three only consider it a hold.

The post This ASX tech share's rallied 16% in 2 months. Here's why appeared first on The Motley Fool Australia.

Something strange is happening with the iShares S&P 500 ETF (ASX: IVV) this week. Back on Monday, units of this exchange-traded fund (ETF) were trading for almost $600 each. But today, this ETF is going for just $39.07 per unit. It also seems to have a new ticker code.

So has this popular ASX ETF really lost almost 95% of its value this week?

The iShares S&P 500 ETF is one of the most widely-held ETFs on the ASX. It's actually the ASX's most popular internationally-based fund. This ETF tracks the S&P 500 Index (SP: .INX), which is the most widely tracked index in the world.

It represents the 500 largest companies on the US markets by market capitalisation. That includes everything from Apple, Microsoft, and Amazon to Exxon Mobil, Coca-Cola, and McDonald's.

So no, this ETF hasn't collapsed by 95% this week. If the US S&P 500 Index was down 95% in one week, we'd certainly all know about it.

Rather, this ETF has just undergone a stock split.

A stock split for the S&P 500 ETF?

A stock split occurs when a company or ETF decides to increase its share (or, in this case, unit) count. It issues new shares (or units) to existing investors, at the same time diluting the value of the existing shares out there.

This has the effect of lowering the share (or unit) price of the company or ETF, but makes up for this by giving away new shares (or units).

This can be done for a number of reasons. But most do so to boost liquidity and to make it easier for investors to buy and sell shares or units.

At the start of this week, one single unit of the iShares S&P 500 ETF would set an investor back almost $600. That makes it a rather unwieldy investment to have to deal with.

This ETF's provider must have thought so too, because back on 23 November, BlackRock announced that the iShares S&P 500 ETF would be undergoing a 15-to-1 stock split.

That means that for every one unit of this ETF, investors now own 15. Concurrently, the unit price of this ETF has just been reduced by a factor of 15.

So if an ASX investor used to own 10 iShares S&P 500 units, worth $5,860, today, they own 150 units, each worth $39.07. Same value, different path to getting there.

So no investor has been left better, or worse off, from this split. It's just a cosmetic change for all intents and purposes.

Is it IVV or IVVDB?

But what's with the new ticker code? Yes, the iShares S&P 500 ETF used to trade under the code 'IVV'. But today, the ETF has seemingly switched to 'IVVDB'. Well, this is a temporary situation.

As we covered last week, part of the stock split process involves the ETF trading under a 'deferred settlement' basis. So today, the 'IVVDB' units represent the deferred settlement units.

This will only be in place until 13 December. That's when the deferred settlement period will have concluded and the ETF reverts to its old 'IVV' code.

The IVVDB units will seamlessly be converted into IVV units when this happens. So if you're desperate to buy the newly-split ETF today, don't let the new code hold you back.

The post Is the iShares S&P 500 ETF (IVV) really down 95% today? appeared first on The Motley Fool Australia.

ASX shares are having a top day of gains so far this Thursday. At present, the S&P/ASX 200 Index (ASX: XJO) has risen by a healthy 0.85% all the way up to just under 7,350 points. But those gains look rather small in comparison to what's happening with the BetaShares NASDAQ 100 ETF (ASX: NDQ).

This index-tracking exchange-traded fund (ETF) is rocketing in value today. BetaShares NASDAQ 100 ETF units are currently enjoying a 2.78% surge in value, lifting the fund up to $27.38 per unit.

So what's behind these pleasing rises this Thursday?

Why is the BetaShares NASDAQ 100 ETF surging in value?

Well, the BetaShares NASDAQ ETF is an index fund that tracks the NASDAQ-100 (NASDAQ: NDX) over in the United States. The NASDAQ 100 is an index that tracks the 100 largest shares on the NASDAQ stock exchange, excluding certain financial companies.

The NASDAQ is well known for being the home of most of the top tech shares on the US markets. Apple Inc (NASDAQ: AAPL), Microsoft Corporation (NASDAQ: MSFT), Amazon.com Inc (NASDAQ: AMZN), Netflix Inc (NASDAQ: NFLX), Alphabet Inc (NASDAQ: GOOG)(NASDAQ: GOOGL) and Tesla Inc (NASDAQ: TSLA) all call the NASDAQ home. As you can tell by their ticker codes.

So as goes the performance of the NASDAQ 100 Index, so goes the BetaShares NASDAQ 100 ETF.

And lo and behold, the NASDAQ 100 had a stellar night last night in US trading. The iIndex finished the session up a rather extraordinary 4.58% to back over 12,000 points.

That's a two-and-a-half-month high. These gains were spurred by the likes of Apple rising close to 5%, Alphabet soaring more than 6%, and Tesla rocketing an incredible 7.67%.

So the BetaShares NASDAQ ETF was always going to have a cracking day. Why isn't it rising by 4.58% like its index, though?

Well, the BetaShares NASDAQ ETF houses assets priced in US dollars. But it is quoted in Australian dollars. Thus, currency movements affect its value, alongside the value of its underlying shares.

And while the US markets rocketed overnight, so too did the Australian dollar. A higher Aussie dollar means that US shares become less valuable in Australian dollar terms. So hence the more muted gains we have seen with the ETF.

Nevertheless, there's no doubt investors are very happy with this ETF today.

The post Why is the BetaShares NASDAQ 100 ETF (NDQ) having such a stellar run today? appeared first on The Motley Fool Australia.

As 2022 starts to close, it's only natural for investors to start peeking toward 2023. So far in 2022, the indexes have fared pretty miserably, with the Nasdaq-100 down 29% and the S&P 500 down 17%. Which one will have a better 2023?

Let's look at these indexes and their makeups and find out which is more likely to have a better 2023 ahead.

The indexes are highly concentrated on the top

At the top, the indexes have a lot of overlap.

Data source: Slickcharts. Data as of Nov. 19. *Note: Both Alphabet class shares combined.

Data source: Slickcharts. Data as of Nov. 19. *Note: Both Alphabet class shares combined.

As you can see, Apple, Microsoft, Amazon, and Alphabet make up a considerable chunk of these indexes. In the S&P 500, they account for 19.83%. It's basically double for the Nasdaq-100, with that group making up 39.16% of the index. It's pretty straightforward: How these companies do will significantly steer how the overall index does.

While these three are tech-focused, they compete in different markets. Both Apple and Amazon are a good measure of the pulse of the consumer, as their sales are highly affected by consumer sentiment. If inflation cools, and consumers don't need to worry about rising grocery prices or housing costs, they may treat themselves to the latest device.

Alphabet and Microsoft are business-focused, but for different reasons. Alphabet's primary revenue stream is advertising, and many clients have pulled back their spending levels in 2022 due to the uncertain business environment. If the outlook improves, expect this revenue to return. Microsoft's cloud business and Office product suite indicate how willing businesses are to spend on their infrastructure, but Microsoft's consumer product division also indicates how individuals are doing. 

If the consumer gets stronger and business outlook improves, these four will boom. If that's the case, then the Nasdaq-100 will likely have a better year because it is concentrated in companies that will benefit the most. But if 2023 brings an economic recession, the S&P 500's diversity will help it to outperform the Nasdaq-100.

The companies outside the top five are very different

For the S&P 500, when you move out of the top five, the companies become much more diverse.

Data source: Slickcharts. Data as of Nov. 19.

Now, there are industrials, healthcare, and energy sectors represented, giving the index some much-needed balance. Looking at the top 20 reveals even more diversity, with financials, energy, and healthcare rounding the index out.

This is far from the case for the Nasdaq-100.

Data source: Slickcharts. Data as of November 19. Note: Both Alphabet class shares combined.

Besides Pepsi and Costco, these companies are more in the tech sector. But, unlike the S&P 500, it doesn't get much better outside the top 10, with most of the top 20 consisting of chipmakers, communication companies, and software businesses. Now, this probably isn't a surprise because the media often refers to this index as the "tech-heavy Nasdaq."

Still, tech businesses don't do well if the economy is struggling.

Does that mean you should write the Nasdaq-100 off? Absolutely not. Tech stocks tend to do very well in the recovery phases of a recession. Plus, the stock market is forward-looking, and stocks usually tend to do better during a recession than leading up to one.

That last tidbit of information should keep investors in the market, especially now with a recession, or at least an economic slowdown, imminent. However, if you're trying to decide which index to buy, you need to utilize the 2023 outlook. If you think 2023 will be a repeat of 2022, then the S&P 500 is the better choice. On the other hand, if you believe the economy will begin to recover and the Federal Reserve eases its interest rate hikes, then the Nasdaq-100 is the place to be.

One last point: There's nothing wrong with owning both indexes if you don't know what 2023 will bring. Personally, I think this is an intelligent strategy, as it gives investors the upside of recovery and the safety of a balanced investment.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Will the Nasdaq or S&P 500 have a better 2023? appeared first on The Motley Fool Australia.

What happened

Shares of big tech stocks Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), and Intel (NASDAQ: INTC) all moved significantly higher today, rocketing 6.2%, 6.6%, and 5.5%, respectively, as of 12:33 p.m. ET.

Those are massive moves for companies that big, but today was no ordinary day. After basically a year of negative surprises in the monthly Consumer Price Index (CPI) releases, with some exceptions, today's CPI print was lower than expected, fueling hopes of a Federal Reserve pause on its aggressive interest rate hikes.

These tech giants are each at least partially exposed to the troubled PC sector, which has been one of the hardest-hit areas of tech. While enterprise spending on cloud and servers has been hanging in, the prospect of more interest rate hikes or recession had led to fears another shoe was to drop. So today's print was especially positive, given that the sooner inflation declines, the sooner the Fed can stop hiking interest rates, and the greater the possibility of avoiding a recession. 

So what

Obviously, Apple and Microsoft make the two main operating systems for virtually all PCs, and Intel's largest business segment is its PC processors. Therefore, each stock had seen a big sell-off this year, despite their size, moats, and relatively limited competition.

Of note, technology research firm Gartner projects that third-quarter PC shipments were down a stunning 19.5% year over year -- the biggest drop since it began tracking PC shipments in the 1990s.

So why is today's CPI print so important in relation to PC sales? Well, the rapidly rising interest rate hikes tend to hit interest rate-sensitive items hardest first, which are usually big-ticket items like housing, autos, home electronics, and business fixed investments, which these days include data centers and enterprise PCs.

Add to that the fact that so many consumers bought new computers during the 2020-2021 timeframe, and could therefore defer the purchase of a new computer, and the rapid shift in rates led to a huge air pocket in PC sales. So, the potential for a pause in interest rate hikes could give big-ticket items a boost from their current severe downturn. 

Apple has held up much better than others, as it had fallen "only" 23.6% this year, as opposed to 32.8% for Microsoft and 44.5% for Intel.

AAPL Year-to-Date Total Returns (Daily) data by YCharts

It's somewhat surprising that Apple has done better than Microsoft, given that it was thought consumer spending on electronics is generally weaker than enterprise spending. Microsoft's More Personal Computing segment, which is geared toward consumer-facing PCs, video games, and Bing digital advertising, is only 30% or so of the business, as opposed to Apple being predominantly a consumer-facing company, so it's strange that Apple had held up better than Microsoft this year. The outperformance does go to show how strong Apple's brand is and how much of a staple the iPhone is.

Intel has really been feeling the pain of the PC downturn this year, because that had been the company's cash cow. New Intel CEO Pat Gelsinger has ambitious plans to catch up to Taiwan Semiconductor Manufacturing in leading-edge semiconductors by achieving five node transitions in four years, while also building out a massive foundry ecosystem to serve third-party chip designers.

That's incredibly hard and very expensive to do, which is why the plummet in PC sales has been so harmful to Intel this year, as it deprived the company of needed cash to execute its investment plans. That's why Intel has traded down to just a single-digit P/E ratio this year.

Given the shellacking these stocks have already taken, and given that the market is forward looking, it's no surprise they are ripping higher at the prospect of inflation cooling off.

Now what

Given the lags with which the Fed's economic policy operates, investors should know that while inflation is slowing, it's because the economy is also slowing. Over the coming months, the Fed will try to keep rates high enough to cool inflation further, without tipping the economy into a recession. Despite today's rally, that's still a tricky proposition. 

A recession would be bad news for all stocks, but of these three, especially Intel, since it is in a capital-intensive hardware business.

On the other hand, today's promising CPI print could allow the Fed to slow down or even stop its rate increases. That would be good for all economically sensitive stocks, as long as the economy doesn't have too bad of a downturn.

As is often the case, Apple and Microsoft still look like strong core holdings for the long term, even in spite of this year's declines. With Intel, an investment really comes down to your belief in CEO Pat Gelsinger's vision and ability to execute. If the turnaround works, Intel stands to have the most upside of these three names; however, if all that spending doesn't result in solid returns or Intel catching up to Taiwan Semi in leading-edge technology, it could be a problem, even if Intel's stock does look cheap today.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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But the Vanguard International Shares ETF is also one of the most diversified funds available, with close to 1,500 individual shares within its underlying investment portfolio. So how can investors know whether this extremely wide fund is a good investment, containing high-quality companies?

Well, let's have a look at how it is actually structured.

How is the Vanguard International Shares ETF built?

So although the Vanguard International Shares ETF holds close to 1,500 different companies, it is actually a very top-heavy ETF. As it turns out, its top five holdings alone account for approximately 15% of the ETF's entire portfolio by weighting.

Let's examine the largest companies in the Vanguard International Shares ETF and see what kind of quality we are getting here

The fund's top holding is Apple Inc (NASDAQ: AAPL), a company that needs little introduction. For one, it's hardly debatable that Apple has one of the strongest brands in the world. But the company can also boast a very stable financial position.

Apple started paying a consistent dividend back in 2012 and has increased its dividend every single year since. Even so, it is still only paying out 14.7% of its earnings as dividends today. That indicates immense financial strength to me.

The next holding in the Vanguard International Shares ETF is Microsoft Corporation (NASDAQ: MSFT), another company that most investors would know well. Chances are most of us use a Microsoft product or service every day, which is a good start.

But Microsoft also has a formidable financial position. This company has a much-envied 17-year streak of growing its annual dividends. It has a higher, but still impressive, dividend payout ratio of 27.4% of earnings today.

More quality companies?

The Vanguard International Shares ETF's next three top holdings are Alphabet Inc (NASDAQ: GOOG)(NASDAQ: GOOGL), Amazon.com Inc (NASDAQ: AMZN), and Tesla Inc (NASDAQ: TSLA).

Here's where things get interesting. Unlike Microsoft and Apple, these companies do not pay dividends at present.

So both Alphabet (parent company of Google) and Amazon shares have had a rough time of late, thanks largely to disappointing earning reports.

However, in Alphabet's case, the company still reported US$69.1 billion in revenue and US$13.9 billion in net income. For the quarter. It also announced that it still has US$116 billion in cash, cash equivalents, and marketable securities on its balance sheet. With almost absolute dominance in the global search market, it's hard to argue that Alphabet isn't still a top-tier company.

Turning to Amazon, this company reported US$127.1 billion in net sales for the quarter, which was up 15% year on year. Amazon is also a household name with a formidable scale and brand. The fact it can still grow its revenue by double digits when it is at 12 figures is enough to call it a quality company in my view.

Tesla might be the most divisive name in the Vanguard International Shares ETF's portfolio. But there's no denying the fact that it is the world leader in electric vehicle manufacturing and battery technology.

Its rise to become one of the largest companies in the world in only a few years is also almost unprecedented. Yet this is a company that still reckons it will increase its production rate by 50% this year.

So, all in all, I think the top five companies in the Vanguard International Shares ETF are of the highest quality. You don't climb to the top of the global companies pile with mediocrity after all.

The post Does the Vanguard International Shares ETF contain 'good' quality companies? appeared first on The Motley Fool Australia.

Despite issues, big tech stocks are incredibly resilient investments. With the global economy up against inflation, the war in Ukraine, and a possible recession in 2023, many tech and software stocks keep chugging higher. Microsoft's (NASDAQ: MSFT) fiscal 2023 first-quarter earnings showcase this resiliency.

But pressure is mounting. A record run-up in the US dollar is only just beginning to blast corporate earnings. Microsoft is going to be more than fine, but a big speed bump looms large. 

King Dollar demands a cut

Just like the other cloud computing giants that reported earnings (Amazon (NASDAQ: AMZN) Web Services and Alphabet's (NASDAQ: GOOGL)(NASDAQ: GOOG) Google Cloud), Microsoft reported a stunning negative effect from currency exchange rates. During the first quarter of its fiscal 2023 (the three months ended 30 September 2022), total revenue increased 11% year over year to $50.1 billion.

However, blacking out the effects of currency exchange rates, revenue would have increased 16%. So, King Dollar took a hefty five-percentage-point toll.  

This is a challenge for any US multinational organization right now. Here's how it works: A sale is made outside of the US and collected in that country's currency, but that money received needs to be converted back into US dollars for reporting purposes. So far, no big deal. But what happens when the dollar increases in value against that foreign currency? Suddenly the value of that international sale gets reduced when exchanged for a stronger dollar. 

All of this is a nasty side effect of the US Federal Reserve's aggressive interest rate hikes this year. Other central banks have been slower to raise rates in their fight against inflation compared to the Fed's record-breaking pace of hikes. This has caused the US dollar's double-digit percentage spike in value this year.  

Thus, Microsoft and friends' problem right now. Revenue growth is still intact, but currency exchange rates are lowering reported financial figures by a very large amount.

A growth stock for nearly 40 years and still counting

The dollar's record run-up is even more demanding on profit margins. Again, like other tech titans, the majority of Microsoft's expenses are made in US dollars. So when those expenses are being made in a strengthening currency versus revenue collected in a weakening international one, the effect is an even larger reduction in profitability. While the dollar took a five-percentage-point cut from Microsoft revenue last quarter, it took a whopping nine-percentage-point cut from operating income -- lowering year-over-year operating profit growth to 6% (versus 15% growth excluding exchange rate effects). Ouch!  

The good news, though, is that even after nearly four decades as a publicly traded company, Microsoft is still very much a growth stock. As CEO Satya Nadella said in the earnings report, "In a world facing increasing headwinds, digital technology is the ultimate tailwind." When software is done right (paired with sticky hardware products we can't separate our lives from), it becomes an incredible growth investment for many decades. With inflation and economic uncertainty the story of the year, Microsoft is still helping its users "do more with less" in new ways.  

Of course, these currency headwinds are expected to continue into Microsoft's Q2 2023 and will likely continue for the rest of the fiscal year. Additionally, the accelerating global economic slowdown is also impacting Microsoft's currency-exchange-neutral growth. The cloud segment Azure, the primary driver of results these days, is projected to slow from a 42% year-over-year growth rate (excluding exchange rates) to about 37% (also currency-neutral) in Q2 fiscal 2023.

While these various factors are concerning, it's clear Microsoft is far more resilient than the average mega-corporation. Shares trade for 24 times trailing-12-month earnings per share (EPS) which looks like fair value to me, assuming the company can grow earnings per share at an average high-single-digit to low-teens percentage for the rest of the 2020s. After all, at some point, the dollar's strength will dissipate -- maybe even reverse -- which would be a boost to Microsoft's revenue and profits.

This market will continue to be wild, but Microsoft looks like a good safe-haven stock to hold for the long term.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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1) Overnight Tuesday, Wall Street rose for a third straight day on a combination of strong corporate earnings and falling bond yields. Excerpt from Bloomberg…

Investors still expect the Fed to raise rates by three-quarters of a percentage point during its meeting next week. But recent economic data is already showing that Fed tightening has started to weigh on the US economy, leading investors to speculate that the central bank may be approaching the end of its aggressive tightening campaign. This renewed expectation of less hawkishness from the Fed, as well as a better-than-expected earnings season so far, have pushed stocks higher in recent days.

2) Earnings from Coca-Cola and General Motors topped estimates. But the wheels fell off after the market close, with Google parent Alphabet missing earnings estimates and fellow tech-giant Microsoft reporting a disappointing revenue forecast.

In after-market trading, both the Alphabet share price and the Microsoft share price fell more than 6%.

It was only yesterday when I said "earnings risk" might usurp the risk of higher interest rates as the dominant driver of equity markets. 

Most of the heavy lifting has already been done on interest rates. Although there's a lag, the desired effect – a slowing of economic growth – is starting to show up in corporate results. If Alphabet and Microsoft are feeling it, you can bet your bottom dollar companies with much less of a competitive advantage will be paddling upstream.

This bear market rally may be about to run out of steam.

3) Turning to Australia, the ASX 200 is largely flat in afternoon trade, at first following Wall Street's lead higher, then falling back after Q3 headline inflation jumped to an annual rate of 7.3%, higher than expectations.

Naturally, Australian bond yields rose as talk of the RBA raising interest rates by 50 basis points on Melbourne Cup day came back into play. That said, according to the Australian Financial Review, interbank futures are implying only a 25% chance of the RBA hiking by 50 basis points. 

Markets have been hanging on the prospect of central banks slowing their rate of interest rate increases. For the time being, inflation is winning the battle, with equities, despite their recent bounce, coming a long second.

4) Speaking of earnings risk, one of today's victims is Codan Ltd (ASX: CDA), the company best known for its gold metal detectors.

The Codan share price is being taken to the woolshed today after it forecast a significant contraction in first-half sales at its dominant Minelab division. Here's what the company said:

Like many businesses we are operating under challenging market conditions, with geopolitical issues, a high inflationary environment and an increasing risk of global recession. The risk of declining sentiment may impact sales in the short term and management continues to monitor this risk closely.

The company expects sales for Minelab to be in the region of $75 to $80 million in the first half of FY23, compared to $138 million in the prior corresponding period. The reduction primarily relates to the disrupted nature of the African market, normalisation of sales as we transition to living with COVID…

Codan joins a long line of COVID beneficiaries – government stimulus in some African countries was seemingly spent on buying gold detectors – turned post-COVID flops. 

Codan shares are now down 80% from their June 2021 high. Ouch.

5) One of the other high profile COVID boom-to-bust stocks is Kogan.com Ltd (ASX:KGN). 

Unlike Codan, the Kogan share price is on the rise today despite reporting first-quarter gross sales falling 38.8%, cycling a quarter in the prior year that was heavily impacted by COVID-19 lockdown orders, a period when online retailers saw booming sales.

Investors today were buoyed by Kogan accelerating the sale of its final excess inventory, with the ever-optimistic Ruslan Kogan saying he does not believe the first quarter trading result is indicative of its projected trading performance.

Inflation and rising interest rates are putting pressure on households across Australia and New Zealand. It's in the Kogan.com DNA to obsess over delivering the most in demand products and services at the best possible prices. We know that during periods of belt tightening like this, our responsibility to be the best place for Aussies and Kiwis to get a bargain on their key household items is more important than ever.

Good luck to Mr Kogan and his Kogan.com business. Kogan.com shares have fallen 86% from their October 2020 peak, although they have bounced almost 30% higher off their July 2022 low.

Whilst Kogan does indeed compete on price, it's not the only discount retailer on the web. And when belts are being tightened, replacement cycles for cheap TVs and the like just might blow out a little.

6) The consumer discretionary stock I'm playing for the coming economic slowdown is Best & Less Group (ASX: BST). 

50% of its sales are in the baby and kids market. As children grow, they need bigger clothes, so there is a repeat purchase element to the business. 90% of its items sold retail for less than $20 and their average selling price is a modest $8.33.

Best & Less is profitable, has net cash on its balance sheet, and pays an attractive fully franked dividend.

Best and Less shares trade on eight times earnings with a fully franked dividend yield of 9.5%. Whilst not immune to an economic slowdown and having formidable competitors in the likes of Big W and Kmart, there does appear to be a decent level of downside protection for Best & Less shareholders.

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How one allocates their own ASX share portfolio is obviously a very personal decision. We are all different people and investors, with different goals, risk tolerances and personalities. One ASX share might be right for one investor, and wrong for another.

For example, a retiree may appreciate the high dividends that an ASX bank share like Westpac Banking Corp (ASX: WBC) doles out. But a younger investor might wish to go for something with a bit more of a growth profile.

There's no right way to invest when it comes to shares (although there are many wrong ways).

With all this in mind, let's discuss how I allocate my own share market portfolio. As discussed above, this is what works for me, and my own strengths and weaknesses.

Now, I have many many different holdings across my portfolio. So I won't discuss all of them. But I will touch on some theses and strategies that I tend to follow, and explain why.

ASX shares, dividends and franking credits

So to start with, I own a mix of ASX and US shares. This is for many reasons. I love the franking credits and local knowledge that makes ASX investing so rewarding.

But I also love the currency, geographic and economic diversity that comes from investing in the United States. What's more, most of the best companies in the world call the US home.

My selection process is a rather simple one: I look for quality companies, usually with a strong brand, that have demonstrated competency and resiliency over a long period of time.

Let's start with the ASX shares. So I do like a share that pays dividends, preferably those of the fully franked variety. One of my oldest holdings is Telstra Corporation Ltd (ASX: TLS).

I bought Telstra back in 2018 when it was trading for under $2.80 a share. The market hated it then, but I saw a company with a dominant brand providing an essential service. I continue to hold it today for those same reasons.

Another ASX share that is a long-term favourite of mine is National Australia Bank Ltd (ASX: NAB). NAB doesn't have the pricing premium that Commonwealth Bank of Australia (ASX: CBA) does. But I still think it is one of the best-run ASX banks.

My favourite ASX share, though, is Washington H. Soul Pattinson and Co Ltd (ASX: SOL). I've discussed my love of Soul Patts before. But quite simply, it is a diversified market beater with an unmatched dividend record.

Looking across the pacific for my portfolio

Turning to US shares, and again my preference is strong brands and a proven track record. That's why my US shares include names like Apple, Microsoft, Mastercard, Alphabet, Nike and Amazon.

Tesla Inc (NASDAQ: TSLA) is another company that I own. When I first invested in the electric car maker, it was one of my riskier shares. But I have been delighted to see the company grow in size and scale (not to mention value).

Most of my other US shares are within the consumer staples sector. I love the resilience and stability that these kinds of shares can add to a portfolio, as well as the dividends, of course. Among my favourites are Coca-Cola, Pepsi, Starbucks and McDonald's.

Many of these companies have made a habit of raising their dividend every single year, so I have enjoyed watching my dividend income inch up steadily over the years.

So that's my ASX share portfolio in a nutshell and why I own the companies that I do. As I said, it may not be for everyone. But it works for me and my goals. And I sleep soundly every night. What more could one ask for?

The post Here's how I allocate my ASX share portfolio and why appeared first on The Motley Fool Australia.

The Nasdaq Composite has plunged deep into bear market territory, dragged down by deteriorating investor sentiment in the face of high inflation and rising interest rates. In fact, the tech-heavy index is now 34% off its high, marking its steepest decline in the last decade.

On the bright side, that broad downturn has created a wealth of buying opportunities for patient investors. For instance, in spite of temporary macroeconomic headwinds, the future looks bright for Microsoft (NASDAQ: MSFT) and Arista Networks (NYSE: ANET), and both stocks are trading at discounted valuations compared to historical price-to-earnings multiples.

Microsoft: An arsenal of critical software and cloud services  

Microsoft breaks its operations into three segments, each packed with widely adopted products. The first is Productivity and Business Processes, at the heart of which is Microsoft 365, the most popular collection of enterprise applications on the planet. In addition to the well-known Office software suite, Microsoft 365 includes market-leading products like Defender and Azure Active Directory for cybersecurity, and Microsoft Teams for communications.

The second segment is Intelligent Cloud, which houses Microsoft SQL Server, the third-most-popular database. But cloud computing platform Microsoft Azure is the heart of this segment. Azure captured 21% market share in cloud infrastructure services in the second quarter, second only to Amazon Web Services. 

The final segment is More Personal Computing, which features Xbox hardware and content, the ubiquitous Windows operating system, and the Bing search engine. But the most exciting part of this segment is advertising. Last year, Microsoft acquired ad tech platform Xandr from AT&T, and Netflix recently selected Microsoft as the ad tech vendor that will power its soon-to-launch ad-supported streaming service.

Broadly speaking, Microsoft's arsenal of critical software products and cloud services makes it resilient, and that advantage has helped the company churn out solid financial results in spite of the difficult economic environment. Over the past year, revenue rose 18% to $198 billion, while free cash flow ticked up 16% to $65 billion. But Microsoft still has room to expand, especially in cybersecurity, cloud computing, and digital advertising.

In fact, the cybersecurity market will grow 12% annually to reach $500 billion by 2030, while the cloud computing market will grow 16% annually to reach $1.5 trillion, according to Grand View Research. Meanwhile, online video advertising spend will increase 14% annually to reach $362 billion by 2027, according to Omdia. Netflix is expected to be a key player in that market, which bodes well for Microsoft.

Currently, Microsoft stock is 32% off its high, and shares trade at 23.7 times earnings, a bargain compared to its five-year average of 35.1 times earnings. That's why investors may regret passing on this growth stock.  

Arista Networks: Technology that powers the cloud

Arista has become the gold standard in high-speed data center networking. Its portfolio includes switching and routing platforms, wireless access points, and adjacent software for network automation, monitoring, and security. Those technologies allow customers to deploy a seamless network across public clouds, private clouds, and enterprise campus environments.

Arista says its principal innovation is the Extensible Operating System (EOS), the uniquely programmable software that runs across every piece of its hardware. That programmability makes Arista's networking platforms very flexible, allowing customers to easily integrate and deploy third-party applications. Additionally, by running a single version of EOS across every switch and router, Arista makes network management less complex and costly compared to vendors like Cisco, which requires customers to run different versions of multiple operating systems across its hardware.

In short, Arista's networking platforms offer industry-leading speed and power efficiency at a lower total cost of ownership. Those selling points have helped it win more than 8,000 customers, including cloud computing giants like Microsoft and Meta Platforms. In turn, Arista has delivered solid financial results on a relatively consistent basis. Revenue climbed 33% to $3.5 billion over the past year, and earnings soared 41% to $3.24 per diluted share.

Looking ahead, Arista is well positioned to maintain that momentum. Data centers will need faster networks to support the ongoing adoption of cloud computing, the growing number of connected devices (e.g. the Internet of Things), and the development of data-intensive applications (e.g. artificial intelligence). That should drive demand for Arista's networking products in the coming years. In fact, management says its addressable market will grow from $23 billion in 2021 to $35 billion by 2025.

Currently, Arista stock is down 27% from its high, and shares trade at 30.8 times earnings, a slight discount to its three-year average of 33.5 times earnings. That's why this growth stock looks like a buy right now. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Microsoft (NASDAQ: MSFT) has grown exponentially in its 47 years of business. Despite a recent market downturn, the company's stock has grown over 200% in the last five years, thanks to the potency of brands such as Xbox, Windows, Azure, and Office. These brands' success and market share will likely help the company continue growing for years to come.

However, Microsoft's stock has fallen 29% since January, along with a long list of other tech stocks. Investors who haven't been able to stay up to date on recent market trends might be perplexed as to why a dominant company like Microsoft has suffered such steep declines in 2022. Let's find out. 

A beaten-down market

Microsoft has been among the many tech stocks hit by rising inflation and slowing consumer demand in 2022. Even though the company has suffered a 29% decline over the year in its share price, other companies have suffered more. For instance, PC component leaders AMD (NASDAQ: AMD) and Nvidia have seen their stocks fall about 60% in the same period. 

While consumer demand has fallen across various industries as the cost of living continues to rise, the PC market has been one of the hardest hit. According to Gartner, PC shipments fell 19.5% in the third quarter of 2022, with the overall market declining by 17.3%.

Most recently, on 7 October, Microsoft's stock dipped 4.5% after AMD pre-announced plummeting PC sales for its September quarter. AMD projected revenue of $5.6 billion vs. analysts' expectations of $6.7 billion, as its client chip sales were down 53% quarter over quarter. The sharp decline for AMD led Microsoft investors to doubt the Windows company's PC-related business. 

Microsoft's PC business is reported under its more personal computing segment, which made up 30% of revenue in the company's fiscal year 2022, which ended 30 June. While Microsoft's prominence in the PC market has triggered investor concern in 2022, its diversified revenue suggests the company will be better off than other companies in weathering market declines. 

Is Microsoft stock a buy?

In fiscal year 2022, Microsoft's best-performing segments were its productivity and business processes segment (which include Office and LinkedIn) and intelligent cloud (revenue from Azure). The former made up 31.9% of Microsoft's revenue in 2022 and saw a rise of 18% year over year, while the latter was responsible for 37.9% of revenue and rose 25%.

Even the company's more personal computing segment isn't a total black cloud on the overall business. In addition to Windows and PC revenue, it includes earnings from Microsoft's Xbox consoles and services, which grew 16% throughout the year. The company may be most known for its influential role in the PC market, but its business has expanded to include far more lucrative markets over the years. 

The cloud market alone was worth $206.5 billion as of Q2 2022, with Microsoft's Azure having the second biggest market share at 21%. According to Grand View Research, the market will grow at a rate of 15.7% from 2022 to 2030. Moreover, Microsoft's segment growth of 25% since 2021 proves the lucrative prospects of its operations in this industry.

Additionally, Microsoft's trailing free cash flow as of 30 June stood at $65.2 billion, matching Alphabet's result within a rounding error but trailing Apple's $107.6 billion. The Windows company will likely see some form of decline in the next year as fears of a recession grow. However, its varied businesses and free cash flow suggest the company is strong enough to overcome it. 

Microsoft's decrease of 29% in its share price in 2022 makes it an absolute bargain, considering its long-term prospects. With the company's substantial market share in promising industries and the funds to carry it through sustained market downturns, an investment in Microsoft is a no-brainer.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Like many growth-focused funds, it's been a very tough 12 months for the Hyperion Global Growth Companies Fund (ASX: HYGG).

The fund consists of "a high-conviction portfolio of quality global listed equities from a research driven, bottom-up investment philosophy". It's looking for companies that have predictable earnings, low debt, sustainable competitive advantages, organic growth options and experienced and proven management teams. 

The September 2022 monthly update shows the fund has declined 31.8% over the past 12 months. The biggest detractors to performance were some of the largest and most popular global tech stocks.

Even for those of us who are somewhat numb to just how far these fallen heroes have tumbled, when the numbers are laid bare, you see just how brutal this market has been for a number of large-cap tech stocks.

Block (NYSE: SQ) – down 74%

Roku (NASDAQ: ROKU) – down 80%

Spotify (NYSE: SPOT) – down 57%

Meta Platforms (NASDAQ: META) – down 55%

How the mighty have fallen. 

Yet Hyperion are sticking to their guns, confident in what they believe will be a low-growth inflationary environment, that such an environment is best for their investing style.

Hyperion says that while short-term performance has been unpredictable, and acknowledging it has been a difficult period for investors, the fund believes it has allocated capital to businesses that will produce superior long-term results. 

The top five holdings at the end of September were all large-cap US tech stocks, namely Tesla (NASDAQ: TSLA), Amazon (NASDAQ: AMZN), Microsoft (NASDAQ: MSFT), ServiceNow (NYSE: NOW) and Airbnb (NASDAQ: ABNB). Combined, they made up over half the Hyperion Global Growth Companies Fund portfolio.

Hyperion went on to say its "global portfolio continues to produce strong short-term financial results which are consistent with the assumptions that underpin our long-term valuations," saying it believes its portfolio "should perform relatively well in an economic downturn".

The Hyperion Global Growth Companies Fund share price has fallen 31.7% over the past 12 months, in line with the underlying performance of the fund.

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As one of the most successful stock pickers in history, Warren Buffett regularly inspires investors around the world. Some of those folks may be interested to know that Buffett's holding company, Berkshire Hathaway Inc (NYSE: BRK.A) (NYSE: BRK.B), has taken a targeted interest in video game powerhouse Activision Blizzard, Inc. (NASDAQ: ATVI) throughout 2022. 

At the end of 2021, Berkshire Hathaway owned roughly 1.8% of Activision Blizzard. Buffett increased his stake in the games company more than once in 2022, with shares growing from 64.3 million to 68.4 million in August -- or about 8.7% of Activision. Let's take a look at why it has captured Buffett's interest.

A possible deal with Microsoft 

Buffett's move to increase his investment in Activision Blizzard was prompted by Microsoft Corporation's (NASDAQ: MSFT) announcement in January that it would acquire the gaming company for $95 per share in an all-cash transaction valued at $68.7 billion. The deal would be the biggest the gaming industry has ever seen, and thus attracted scrutiny from regulators around the world. Buffett garnered criticism back in April when Berkshire Hathaway first increased its investment in the company, as analysts believed the move was a gamble in the face of pending regulatory decisions.

However, Buffett's move to load up on Activision stock was a vote of confidence that the deal will be completed. The acquisition requires approval from various countries to ensure it does not lead to Microsoft becoming overly dominant in the video game market. The concern stems from Activision's franchise Call of Duty, the world's second-best-selling game series. In 2020 alone, more than 200 million people bought a total of $3 billion worth of products related to the franchise.

Under Microsoft's control, those games could give it a significantly greater edge in attracting players to its consoles and services over those of its competitors. While Activision Blizzard's game library would be a lucrative asset for Microsoft, the company is unlikely to become all-controlling in the market. Even with this acquisition, it would be just the third-largest video game company after Tencent and Sony -- a fact that bodes well for the deal's regulatory approval.

On Aug. 22, Saudi Arabia's regulator became the first authority to give the acquisition its stamp of approval. However, Microsoft most crucially needs sign-offs from the world's three main regulators: the U.S. Federal Trade Commission (FTC), the United Kingdom's Competition and Markets Authority (CMA), and the European Commission. Each of them has the power to block the deal or impose conditions. 

What will the acquisition mean?

As the Activision Blizzard acquisition would be an all-cash deal, investors in the gaming company would see their shares disappear from their portfolios, replaced with the cash value if the purchase goes through. Activision Blizzard stock sits at about $75 a share and has fluctuated in the range of $75 to $79 over the past month.

Consequently, prospective buyers stand to profit by a little over 26% at Microsoft's purchase price of $95 a share. The Berkshire Hathaway stake is currently worth about $5.1 billion, which will become $6.4 billion if the deal goes through.

Even if the acquisition does not occur, Activision Blizzard shares may still make a smart, long-term buy. The share price is still 28% below the height it reached in February 2021, before it began to plummet following negative reports about the company's treatment of its employees. Additionally, Buffett purchased a stake in Activision Blizzard before the Microsoft deal was announced, an indication that he believes in the outlook for the video game company.

How likely is regulatory approval? 

The CMA revealed on Sept. 15 that it planned to take an even more "in-depth" approach to its regulatory process, moving into phase two of its investigation. The British antitrust authority has expressed concerns that Microsoft's Activision Blizzard acquisition would be anti-competitive. The CMA's next step will examine whether the deal means that Microsoft could "withhold or degrade" Activision's content from competing consoles or services and whether it will "raise barriers to entry and foreclose rivals in cloud gaming services."

The main concern is that Microsoft will make Call of Duty exclusive to its Xbox consoles. However, Microsoft has already asserted that it has no plans to do so, which should mitigate antitrust concerns. It's possible that regulators could approve the deal with the stipulation that Activision titles cannot be made exclusive to Xbox consoles -- a condition that would not devalue the deal for Microsoft. 

Both parties have expressed optimism that the deal will go through. Activision Blizzard CEO Bobby Kotick said on Sept. 1 that the process is "generally moving along as expected," and said he expects it to be complete by June 2023. All in all, there seems to be a great deal of positivity surrounding the Activision acquisition, which has only been strengthened by Buffett's confidence in the stock. Now might be the best time to buy. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Countless factors affect stock prices on a daily basis. Some are very broad like global events and macroeconomic trends. Others are more narrow: company-specific news or changes to analyst price targets. But all of those things affect investor sentiment to some degree, making it impossible to predict which direction a stock (or even the broad market) will move in the short term.

You may hear stories about day traders who made a fortune overnight. Well, some lucky people have also become millionaires by playing the lottery, but that doesn't mean you should invest your money in lottery tickets. Several studies have shown the vast majority of day traders actually lose money, and the ones who manage to turn a profit often make less than minimum wage.

Put simply, the best way to make money in the stock market is a long-term investment strategy. For instance, the S&P 500 has produced a positive return 100% of the time over any 20-year window between 1919 and 2021, according to Crestmont Research. That means patient investors who held an S&P 500 index fund for at least two consecutive decades (at any point over the last century) always made money.

Here is one way to benefit from that information.

A simple way to make money in the stock market

The Vanguard S&P 500 ETF (NYSEMKT: IVOO) is a passively managed fund that tracks the performance of the S&P 500, which includes 500 of the largest U.S. companies. That may be less exciting than buying individual stocks, but there are several advantages to this strategy investors should consider.

First, the Vanguard S&P 500 ETF offers instant diversification across all 11 market sectors, and investors get exposure to some of the most valuable brands in the world. For instance, the top 20 holdings include industry-leading names like Apple, Inc. (NASDAQ: AAPL), Microsoft Corporation (NASDAQ: MSFT), Amazon.com, Inc.(NASDAQ: AMZN), The Home Depot, Inc.(NYSE: HD), Mastercard Incorporated(NYSE:MA), Visa Inc. (NYSE: V), UnitedHealth Group (NYSE: UNH), Johnson & Johnson (NYSE: JNJ), Tesla Corp Ltd (NASDAQ: TSLA), Alphabet Inc. (NASDAQ: GOOG) (NASDAQ: GOOGL), and ExxonMobil Corporation (NYSE: XOM).

Second, the Vanguard S&P 500 ETF is cheap and time-efficient. It bears an expense ratio of 0.03%, meaning investors would pay only $1.50 per year in fees on a $5,000 portfolio. Additionally, it requires very little work, because there is no need to research specific companies or stay up to date on financial results. Investors can simply buy the ETF and forget about it.

In short, while it may be boring, buying an S&P 500 index fund is a simple, inexpensive, and time-tested path to making money in the stock market. That's why Warren Buffett has often advocated for this investment strategy.

Third, the Vanguard S&P 500 has generated a total return of 206% over the last decade, which is equivalent to an annualized return of 11.8%. At that pace, $100 invested on a weekly basis would grow into a $1 million portfolio in 28 years, and it would grow into a $2 million portfolio in 34 years.

How I manage my portfolio

An S&P 500 index fund does not have to be your only investment. Personally, I keep a certain percentage of my portfolio in the Vanguard S&P 500 ETF, but I also own dozens of individual growth stocks. I think of the S&P 500 index fund as a sort of safety net, a reliable money maker in the long run.

Of course, nothing is truly guaranteed when it comes to the stock market, but the S&P 500 has undeniably produced a positive return over every rolling 20-year period since 1919. And that knowledge makes me feel comfortable taking a little more risk with my other investments.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Microsoft Corporation (NASDAQ: MSFT) has its hands in many different businesses. Most investors think immediately of the company's Windows computer software or Azure, its public cloud segment. But gaming has long been a part of the company, starting with personal computers and the Xbox gaming console that first launched in 2001.

Gaming remains a rapidly growing business today, and Microsoft is arguably more dedicated to the industry than ever before. Here is how Microsoft is battling for market share in the gaming sector and why it could benefit shareholders over the long-term.

Gaming may be more significant than you realize

Most celebrities rise to fame through the film and music industries, long considered the pillars of entertainment. But you might not have known that the gaming industry's $180 billion revenue in 2021 was more than that of film and music combined.

What's more, the industry is still growing; research from Mordor Intelligence estimates that global gaming could grow to $340 billion in value by 2027, driven by increased accessibility through emerging gaming methods like mobile and cloud-based gaming.

Microsoft's broad exposure to gaming makes it a logical sector for the company to invest in further. For example, PC gaming is in Microsoft's wheelhouse, given that Windows has roughly 76% market share of the global desktop computer operating system market. Additionally, the company has built up its Xbox ecosystem, consisting of multiple console products and a subscription service for gaming content, including cloud-based gaming for phones, tablets, and laptops.

Borrowing a strategy from the streaming wars

Microsoft's subscription service, called Game Pass, is where it has put its financial muscle in recent years. Content has become king in the ongoing video streaming wars. Netflix, Inc.(NASDAQ: NFLX) was the first streaming platform to market, but a company like The Walt Disney Company (NYSE: DIS) has quickly built a rival service because its rich library of intellectual content draws eyeballs. Netflix initially licensed content from third parties but was forced to spend heavily to develop its own after these third parties figured out the importance of that content and launched their own streaming services.

It can work similarly in video games. Many people don't buy an Xbox or a Playstation console because they love the hardware itself; you buy whatever will give you access to your favorite gaming content. That's probably why gaming companies fight and spend to keep key game franchises exclusive to their consoles. You'll probably never see a game franchise like Mario, the second-highest-grossing game franchise of all time, on any hardware other than a Nintendo system.

Microsoft seems to be buying into this content strategy -- literally. It spent $7.5 billion in 2021 to acquire ZeniMax, the parent company of Bethesda Studios, which owns trendy game franchises like Elder Scrolls, Fallout, and Doom. More recently, it has a pending acquisition of Activision Blizzard, Inc.(NASDAQ: ATVI) for $68.7 billion, a deal still undergoing regulatory review. Closing that deal would give Microsoft ownership of some of the most popular gaming franchises in history, including World of Warcraft and Call of Duty.

Recurring revenue is the long-term goal

Microsoft wants Game Pass to be such a good value that it would be silly not to subscribe. The service currently costs $14.99 per month, includes instant access to nearly 500 games, and includes free access to cloud gaming and day-one access to virtually every game released by one of the 32 game studios that Microsoft will own if the Activision Blizzard deal closes (23 without the merger).

Microsoft revealed that Game Pass hit 25 million subscribers when it announced its deal with Activision Blizzard. There is a ton of room for growth -- 5G is helping bring the connectivity required for gaming to more areas of the world, including an estimated 3.24 billion gamers.

Microsoft is spending to acquire top-notch gaming content because Game Pass could eventually become a free cash flow geyser for the company. Getting Game Pass to 100 million subscribers paying $14.99 monthly would total $18 billion in annual recurring revenue, which would be far more profitable than selling gaming consoles alone. Gaming is a vast business, and Microsoft wants to be king of that hill.

There are plenty of reasons to like Microsoft as a long-term investment, but gaming might be its next big thing. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Amazon (NASDAQ: AMZN) is no stranger to antitrust lawsuits. Just the other day, California filed a suit against Amazon alleging anticompetitive pricing policies. This filing isn't the first time these allegations have come up, and it likely won't be the last.

Because of the current environment, it's not a far-fetched idea that Amazon could be split up voluntarily or by the government. It's a worthwhile exercise to value each business segment of the company separately for two reasons. First, it could prepare investors for a split. Second, it also serves as a method to value the company and determine if it's worth an investment today.

Let's see how each segment is valued and if Amazon is worth your investment dollars.

A large business with multiple segments

Amazon's business can be split into two main segments: commerce and cloud computing. Commerce is much broader than the website you order items from. It also includes advertising, third-party seller services, and subscription products. Cloud computing, better known as Amazon Web Services (AWS), provides the infrastructure to process workloads through the cloud.

The commerce segment also generates the bulk of Amazon's revenue. Over the past 12 months, the company brought in $485.9 billion in sales overall, and 85% of that came from commerce. However, that segment hasn't made any money over the past year. It lost $7.1 billion; whereas, AWS made $22.4 billion in operating income.

Those figures group all of the many commerce segments together. Amazon doesn't break out its expenses for each segment, but it does break out its sales.

Source: Amazon. YOY = year over year.

This table provides valuable insights. First, its online-store segment didn't grow its sales but is still the largest. Second, AWS is the fastest-growing segment (the "other" segment is volatile, so growth likely isn't sustainable) and the second largest. Lastly, advertising services still grew 21% year over year during a difficult ad environment.

Overall, Amazon's quarter was strong; it was just dragged down by its largest segment having difficult comparisons, because 2021's second quarter was still during the height of COVID-19. But should the company need to be split, it's challenging to determine which segments would go where.

AWS would likely need to be its own entity because it is unrelated to commerce. Advertising could be seen as a conflict of interest, as it should theoretically be a neutral marketplace. One seller could pay Amazon to place its product above other similar ones, even if it is lower rated or more expensive. The rest of the divisions -- online stores, physical stores, third-party services, and subscriptions -- could remain a separate company.

That leaves three separate businesses: cloud computing, advertising, and commerce. Now it's time to determine what each business is worth.

Valuation by parts

To determine what each entity is worth, I'll apply a valuation comparable to companies that perform services similar to the newly formed Amazon businesses. While this approach has flaws, it's a good way to estimate a valuation for each business.

First, investors could compare the commerce business to retail giants like Target Corporation (NYSE: TGT) or Wal-mart Stores, Inc.(NYSE: WMT). These two trade for 0.7 and 0.6 times sales, respectively. While these two companies have a more expensive physical footprint, Amazon has to pay for delivery. However, unlike Amazon's commerce business, Walmart and Target are consistently profitable. Because of this, I will apply a valuation of 0.5 times sales to Amazon's commerce business.

For advertising, The Trade Desk (NASDAQ: TTD) is a similar business. Its ad-tech platform connects buyers to sellers to ensure advertisers get the best results. Amazon's platform has similar capabilities but also deals directly with ads, unlike The Trade Desk. Because of this, I'm going to discount this business significantly. The Trade Desk is valued at 22 times sales, but I'm going to cut that in half for Amazon's ad business to 11 times sales.

Lastly, AWS is likely the most valuable. It's growing quickly and is highly profitable. Its two main competitors, Microsoft's (NASDAQ: MSFT)Azure and Alphabet's (NASDAQ: GOOGL)(NASDAQ: GOOG)Google Cloud, aren't stand-alone companies, so a valuation can't be deduced from them.

There aren't many businesses like it, but Adobe Inc.(NASDAQ: ADBE) comes close. The product isn't close to AWS, but its subscription revenue stream and high operating margins (35%) are similar to AWS. Adobe trades at 8.5 times sales, which is influenced by recent acquisition news. Before then, it traded at 11 times sales. I'll apply a valuation of 13 times sales to AWS to adjust for this drop and account for AWS' faster sales growth.

Now, let's see the value of all three businesses.

Source: Amazon. P/S = price to sales. TTM = trailing 12 months.

Now, let's add up those three segments. Using this method, Amazon's entire business is worth $1.5 trillion. However, its current market cap is $1.26 trillion. That means, according to my valuation method, the company's stock is currently undervalued by 19%. 

So, if Amazon gets broken up by regulators or through its own decision, investors will likely make a quick profit through a split. But that action might not happen.

One thing that is certain is that investors can purchase Amazon's stock today. With its recent price movement, it looks undervalued, and investors should consider establishing a position and holding it for an extended period, even if it gets broken up.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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The stock market suffered a setback on Tuesday, giving back gains from Monday's session amid renewed fears about what the Federal Reserve might do when it concludes its two-day monetary policy meeting on Wednesday. Losses for the Dow Jones Industrial Average (DJINDICES: ^DJI), S&P 500 (SNPINDEX: ^GSPC), and Nasdaq Composite (NASDAQINDEX: ^IXIC) amounted to roughly 1%, with small-cap stocks taking relatively larger hits than their large-cap counterparts.

Data source: Yahoo! Finance.

As the stock market becomes more volatile, investors are increasingly appreciating companies that reward them with predictable and growing streams of dividend income. Today, Microsoft (NASDAQ: MSFT) announced that it would boost its quarterly payout to shareholders. The tech giant pays a relatively modest yield, but some other dividend-stock stalwarts are also in line to pay more to their investors in the near future. Read on to learn more about Microsoft as well as three other companies that could give similar rewards to shareholders soon.

A higher payout for Microsoft

Microsoft stock didn't do all that well on Tuesday, losing almost 1% in the regular trading session. However, long-term investors will get a little bit more from  the software giant in the form of higher dividend checks.

Microsoft's board of directors declared a quarterly dividend of $0.68 per share. Shareholders of record as of Nov. 17 will receive the higher payout, which will show up in investors' accounts on Dec. 8. The payout is $0.06 higher than the previous $0.62 per-share quarterly dividend.

With a dividend yield of only about 1%, most investors don't think much about Microsoft as a dividend stock. Yet the company has developed a solid track record of boosting dividend payouts over time, with the latest move making 2022 the 20th straight year in which Microsoft has paid more in annual dividends than in the previous year.

These companies could be next

Many companies have even longer track records than Microsoft in paying higher dividends. For instance, the following three companies typically announce their dividend increases around this time of year:

• Emerson Electric (NYSE: EMR) has an impressive 65-year track record of paying higher dividends to its shareholders. The company's most recent increase came last November when it announced a 2% boost to $0.515 per share on a quarterly basis.
• Fast-food giant McDonald's (NYSE: MCD) made a larger payout boost late last year, increasing quarterly dividends by $0.09 to $1.38 per share. The Golden Arches chain has a 47-year streak of paying higher dividends for long-term shareholders.
• ExxonMobil (NYSE: XOM) has a 40-year dividend-increase streak on the line as it enters the final months of the year. Last year's most recent payout boost added just a single penny to the quarterly payout, with shareholders receiving $0.88 per share each quarter.

There's no guarantee that these companies will follow through with dividend increases. Every year, there are often at least a few long-paying dividend stocks that have to make payout cuts or even suspend their payouts temporarily.

However, all three of these blue chip stocks have strong businesses underlying them, and they've had the ability to weather difficult economic times in the past and still give their shareholders higher payouts over time. At a time when many investors are feeling increasingly uncomfortable with how much the prices of their stocks have fallen, the extra confidence of knowing that they can receive a quarterly check from these companies is especially valuable.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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If you invested $10,000 in Tesla's (NASDAQ: TSLA) public debut back in June of 2010, you'd be sitting on a cool $1.94 million today. By comparison, the same amount invested in an index fund would have yielded a far more modest total return on capital ranging from $30,000 to $42,000, depending on which benchmark the fund was designed to track.   

As a result of this jaw-dropping performance over the past 12 years, Tesla has earned an exceptionally loyal following from its shareholders. Because of this, the electric car and renewable energy giant has been one of the few tech-heavy outfits to generate positive returns for investors over the past 12 months.

Thanks to a flurry of headwinds such as rising interest rates, soaring inflation, supply chain woes, and geopolitical turmoil, tech giants Amazon.com, Inc.(NASDAQ: AMZN) and Microsoft Corporation (NASDAQ: MSFT) have lost 27.9% and 17.7% of their value, respectively, since September of 2021. Meanwhile, Tesla, which is largely subject to these exact same macroeconomic pressures, has netted shareholders a respectable 22% gain over this same period.  

Can Tesla's stock continue to defy the broader market? Let's take a look at both sides of the argument to find out.

Tesla's value proposition: A Wall Street battleground

If you browse the surfeit of analyst research reports on Tesla stock, you'll definitely walk away with the impression that Wall Street is divided on the company's outlook.

On the bear side of the ledger, for instance, Tesla's fair-value estimate of $255 per share, per Morningstar, reflects the uncertainty inherent in the growth prospects of the electric vehicle market at large, along with the company's continued ability to maintain an elite brand cachet in a space that is widely expected to attract multiple new competitors in the years to come. This lowball valuation also doesn't assign much in the way of net present value for Tesla's renewable energy business or its growing aspirations in the field of robotics. 

On the bull side, Tesla's 12-month forward-looking price target of $374 per share, from the research firm Argus, is steeped in the idea that the company will likely continue to dominate the emerging electric vehicle market for the remainder of the decade, successfully diversifying into other high-growth areas, such as robotics, along the way. 

This belief is founded on the fact that Tesla currently plows an eye-catching 19% of gross profits into research and development, which is one of the highest spends on R&D (as a function of gross profits) within its peer group. bulls, in short, appear confident in Tesla's ability to maintain a competitive edge, thanks to this elevated level of investment in R&D. 

Is this growth stock immune to recessionary pressures?

Now, Tesla's stock hasn't completely escaped the ravages of the 2022 bear market. The company's shares are currently down by a little over 12% year to date. That said, Tesla stock has performed admirably in 2022 overall.

What's important to understand is that this unrelenting bear market has taken a hatchet to nearly every tech-oriented stock with a premium valuation in 2022. Tesla's shares, though, have largely evaded this marketwide pullback across this particular asset class -- despite the company's shares trading at over 51 times 2023 estimated earnings right now. Underscoring this point, the electric vehicle giant's shares have outperformed approximately two-thirds of its large-cap peers in consumer cyclicals this year.  

What's the secret to Tesla's resilience in the middle of a raging bear market? Put simply, Tesla's loyal shareholder base, enormous long-term opportunities in electric vehicles, renewable sources of energy, and robotics aspirations have kept its stock safe from the worst of the 2022 bear market.

That's an intriguing sign for bulls. The long and short of it is that even this dour market isn't buying the bear view that Tesla's competitive edge will gradually evaporate or that it will fail to innovate in ancillary markets such as renewable energy and/or robotics. 

So if you're looking for a stock that can shrug off the market's laser-like focus on a possible recession, Tesla ought to be at the top of your list. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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