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“Exploring the Potential of the Sole ‘Magnificent Seven’ Stock Set to Outperform in 2025 and Beyond”

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Microsoft: The Top Pick from the Magnificent Seven for 2025

The “Magnificent Seven” includes a group of seven tech-focused companies: Microsoft (NASDAQ: MSFT), Apple, Nvidia, Alphabet, Amazon, Meta Platforms, and Tesla. In 2023, these seven outperformed the S&P 500, and all except Microsoft did the same in 2024.

This article explains why Microsoft is my favored buy from the Magnificent Seven for 2025 and how it is poised to benefit investors in the long run.

Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. See the 10 stocks »

A person smiling while holding a laptop computer and looking at cables.

Image source: Getty Images.

Microsoft’s Performance: A Down Year for a Long-Term Winner

In 2024, Microsoft delivered a modest 12.1% gain, falling short compared to the S&P 500 and its Magnificent Seven peers.

NVDA Chart

NVDA data by YCharts

Nonetheless, over the past five years, Microsoft’s stock has significantly outperformed the S&P 500, making it a solid long-term investment.

Understanding a company’s operations and future direction is essential. Microsoft offers a transparent business model backed by a clear growth strategy.

Microsoft’s Business Model Today

Microsoft operates a diverse business that includes hardware and software across three major segments: Productivity and Business Processes (including Microsoft 365 and LinkedIn), Microsoft Intelligent Cloud (featuring Azure and enterprise support), and More Personal Computing (providing Windows and Xbox).

All segments are witnessing growth, with the most significant profits stemming from its largest segment.

In the first quarter of fiscal 2025 (ending September 30, 2024), Productivity and Business Processes represented 43.2% of revenue and boasted an impressive 58.3% operating margin.

Microsoft Intelligent Cloud accounted for 36.7% of revenue with a 43.6% operating margin, while More Personal Computing contributed 20.1% of revenue and had a 26.8% operating margin.

Recent expansions in artificial intelligence (AI) for Microsoft 365 and cloud services have opened new markets, demonstrating the company’s commitment to innovation and technology advancement.

Microsoft’s Vision for the Future

On January 3, Microsoft Vice Chair & President Brad Smith published a blog post titled “The Golden Opportunity for American AI,” highlighting the transformative power of AI:

Not since the invention of electricity has the United States had the opportunity it has today to harness new technology to invigorate the nation’s economy. In many ways, artificial intelligence is the electricity of our age, and the next four years can build a foundation for America’s economic success for the next quarter century.

A key takeaway from Smith’s blog was the commitment to invest significantly in infrastructure:

In FY 2025, Microsoft is on track to invest approximately $80 billion to build out AI-enabled data centers to train AI models and deploy AI and cloud-based applications around the world. More than half of this total investment will be in the United States, reflecting our commitment to this country and our confidence in the American economy.

This $80 billion investment plan is ambitious, even for a giant like Microsoft. The company has consistently increased its operating and research and development (R&D) expenses while capital expenditures have soared in recent years.

MSFT Total Operating Expenses (TTM) Chart

MSFT Total Operating Expenses (TTM) data by YCharts

Despite these rising costs, Microsoft has managed to enhance its operating margins by successfully monetizing its AI ventures.

As Microsoft ramps up its investments, investors should be aware of potential dips in margins, as infrastructure will take time to yield returns. Additionally, any downturn in the market could affect Microsoft’s performance. Nevertheless, the company possesses the financial strength to navigate such challenges and to pursue long-term investments.

A Financially Healthy Company with a Rising Dividend

Microsoft’s recent financial quarter showed an excess of cash, cash equivalents, and short-term investments compared to its debt, highlighting its financial stability. The company holds AAA and Aaa credit ratings from S&P Global and Moody’s, underscoring its prudent financial management.

While maintaining a robust balance sheet, Microsoft has reduced the pace of stock buybacks in order to fund its AI projects. It still engages in buybacks sufficient to prevent dilution of shareholder value, but the gap has narrowed recently as stock-based compensation expenses have more than doubled over the past five years.

MSFT Stock Based Compensation (TTM) Chart

MSFT Stock Based Compensation (TTM) data by YCharts

Microsoft is committed to returning value to investors through a growing dividend, announcing a 10% payout increase in September, marking its 15th straight annual increase. This consistent growth reflects a trend in which dividends have more than quintupled over the last 15 years.

Even if buybacks slow down, Microsoft continues to provide substantial capital returns to its shareholders through dividends.

Leading the Charge in AI Advancement

With strong fundamentals, Microsoft presents a solid investment option for 2025 and beyond. Its current price-to-earnings (P/E) ratio stands at 34.9, slightly above its 10-year median of 32.1. This seemingly higher valuation is warranted, as Microsoft’s growth prospects and business strength have significantly improved over the past decade.

Investing in Microsoft today signals confidence in the potential returns of its AI initiatives and its strategic choice to prioritize infrastructure investments over stock buybacks. Given its strong profitability, diversified operations, and robust financial standing, Microsoft is poised to be a key player moving forward.

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Microsoft’s Bold Approach: Is There Still Time to Invest?

Investors are watching Microsoft closely as the company increases its dividends, showing confidence in its financial future.

Could this be your chance to seize a rare investment opportunity?

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  • Nvidia: If you invested $1,000 when we doubled down in 2009, you’d have $363,385!*
  • Apple: If you invested $1,000 when we doubled down in 2008, you’d have $45,870!*
  • Netflix: If you invested $1,000 when we doubled down in 2004, you’d have $474,140!*

Currently, we’re issuing “Double Down” alerts for three exceptional companies. Opportunities like this are rare, and this might be your moment.

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*Stock Advisor returns as of January 6, 2025

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is also a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, part of Amazon, holds a position on The Motley Fool’s board as well. Daniel Foelber has no stake in any of the mentioned stocks. The Motley Fool holds positions in and recommends several companies, including Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Moody’s, Nvidia, S&P Global, and Tesla. The Motley Fool also recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. Please see The Motley Fool’s disclosure policy for more information.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Nasdaq, Inc.

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