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Microsoft: A Steady Growth Leader in a Sea of Giants
It was a little over six years ago that Apple became the world’s first trillion-dollar company. Now, there are several others with market caps over $1 trillion and a handful of companies valued at over $3 trillion.
Although the stock market can fluctuate unpredictably in the short term, Microsoft (NASDAQ: MSFT) appears positioned for steady growth moving towards 2025—an attribute not shared by all companies in the trillion-dollar club.
Here’s why Microsoft stands out as the most attractive investment among ultra-megacap stocks.
Image source: Getty Images.
Staying Nimble
What stands out about Microsoft is its commitment to enhancing the quality of its earnings while embracing innovation and calculated risks. In recent years, the company has seen transformative growth, all while keeping many of its long-standing software solutions operational.
The integration of artificial intelligence (AI) into its lucrative Intelligent Cloud segment is a prime example. Microsoft continues to roll out its AI assistant, Copilot, across the Microsoft 365 suite and other business sectors.
A telling example is GitHub Copilot, which has rapidly become the go-to AI-powered developer tool. According to Microsoft’s fourth-quarter fiscal 2024 earnings call, GitHub’s annual revenue run rate has reached $2 billion.
On October 21, Microsoft introduced new autonomous agents that users can assign specific tasks through Copilot Studio. Businesses will be able to create agents for various functions, including managing sales leads, data organization, and customer support. This release exemplifies how Microsoft maintains a strong position across different markets.
Often, large companies become sluggish and lose the drive that fueled their initial success. However, Microsoft has managed to leverage its size without letting it hinder innovation.
While increasing spending to foster growth, Microsoft does so prudently. The company continues extensive share buybacks and consistently raises its dividends each year.
With multiple avenues to generate shareholder value, Microsoft does not lean only on fresh ideas nor is it heavily reliant on legacy products. Notably, it buys back sufficient stock to compensate for stock-based compensation. Over the last decade, Microsoft has reduced its share count by 9.6%, even as stock-based compensation surpassed $10 billion in fiscal 2024.
MSFT shares outstanding; data by YCharts.
Crucially, Microsoft holds more cash and liquid assets than debt. At the end of fiscal 2024 (June 30), it reported $18.32 billion in cash, $57.23 billion in short-term investments, and $42.69 billion in long-term debt.
A High-Margin Cash Cow
Investors can often get caught up in the sheer amount of revenue and earnings without assessing their sustainability. Numerous companies have delivered excellent results due to a one-time hit product, only to see demand fade and results tumble.
Other examples include Apple surpassing BlackBerry and Netflix taking over Blockbuster, highlighting shifts in consumer preferences that can leave once-prominent companies behind.
Microsoft, however, benefits from a robust competitive advantage or ‘moat.’ It excels across multiple sectors, including Microsoft Cloud, Windows, Office products, LinkedIn, Xbox offerings, server products, and enterprise services.
Here’s a breakdown of Microsoft’s fiscal 2024 revenue by segment:
|
Segment Revenue |
2024 Results |
|---|---|
|
Productivity and business processes |
$77.73 billion |
|
Intelligent Cloud |
$105.36 billion |
|
Other personal computing |
$62.03 billion |
|
Total revenue |
$245.12 billion |
|
SEGMENT OPERATING INCOME |
|
|
Productivity and business processes |
$40.54 billion |
|
Intelligent Cloud |
$49.58 billion |
|
Other personal computing |
$19.31 billion |
|
Total operating income |
$109.43 billion |
|
OPERATING MARGIN |
44.6% |
Data source: Microsoft.
A decade ago, Microsoft generated $86.83 billion in revenue with an operating income of $27.9 billion. Today, while revenue has increased by 161.9%, operating income has surged nearly fourfold. Notably, the Intelligent Cloud segment alone now brings in more revenue and nearly double the operating income compared to the company’s total output a decade ago.
Built to Last
Though Microsoft faces competition in all its sectors, it adeptly creates useful tools that span its business areas. The rollout of Copilot and broader AI applications illustrates how Microsoft enhances various platforms simultaneously.
Overall, Microsoft’s diverse portfolio, financial stability, and innovative spirit position the company well for the future.
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Evaluating Microsoft’s Earnings Potential Amidst Market Concerns
The Case for Microsoft’s Value Despite High Earnings Multiples
Some analysts worry that Microsoft’s earnings profile might be at risk. Although the stock trades at a high multiple of 37.1 times earnings, the quality of these earnings and Microsoft’s ability to grow revenue through diverse segments and stock buybacks offer a more favorable outlook than initially suggested.
Due to these factors, Microsoft emerges as a standout company that balances risk and reward, especially as it remains a titan valued at over $1 trillion.
Is Now the Right Time to Invest $1,000 in Microsoft?
Before purchasing Microsoft shares, you should think carefully about a few points:
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Daniel Foelber has no stake in any of the stocks mentioned. The Motley Fool holds positions in and recommends Apple, Microsoft, and Netflix, and also recommends options strategies involving Microsoft. There is a disclosure policy in place at The Motley Fool.
The views and opinions expressed here are solely those of the author and do not necessarily reflect those of Nasdaq, Inc.
