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Valued at $3.07 trillion, Microsoft Corporation (MSFT) is a world-renowned company that has long dominated the technology industry. Microsoft stock has been a popular choice among investors due to its legacy portfolio, brand strength, innovative artificial intelligence (AI) strategies, strong financial performance, and strategic acquisitions.
Furthermore, with the investment in OpenAI in 2019, the company boosted investors' enthusiasm. Over the last decade, the stock has returned a staggering 793.4%.
In 2024, though, MSFT stock is up 12.5% year-to-date, lagging the Nasdaq Composite's ($NASX) 15.9% gain.
Nonetheless, Microsoft has plenty of juice left in the tank to maintain its dominant position in the tech space. Let's find out more.
Microsoft Stock: A Strong Tech Play
Microsoft has consistently delivered strong financial results over the past few years, as the result of its ongoing efforts to push the boundaries of technology and innovation.
The company's Azure platform has been a key component of its growth strategy, with cloud computing becoming more popular. Azure has maintained its position as the second-largest cloud provider, following Amazon (AMZN) Web Services (AWS). Furthermore, Microsoft's significant investment in AI, which now powers Azure and its other flagship products, should continue to boost revenues in the coming quarters.
In the fourth quarter of fiscal 2024, Microsoft reported that Azure AI now serves over 60,000 customers. During the quarter, revenue increased by double digits across all three segments.
The Intelligent Cloud segment (which includes server products and cloud services) increased 19% year-over-year (YoY).
Similarly, the Productivity and Business Processes segment (which includes Dynamics 365, Office commercial and consumer products and services, LinkedIn, and others) rose 11% YoY. Concurrently, the More Personal Computing segment (which includes Windows, Gaming, Search, and news advertising revenue) increased by 14%. Total revenue in Q4 increased by 15% to $64.7 billion, with a 10% growth in adjusted earnings per share (EPS) to $2.95.
For the full fiscal year 2024, revenue increased by 16%, with adjusted EPS growth of 20%.
At the end of Q4, the company had a cash balance totaling $75.5 billion, with long-term debt of $42.6 billion. Microsoft paid out $8.4 billion to shareholders through dividends and share repurchases. The company pays a 0.72% yield, lower than the technology sector average of 1.3%. However, its forward payout ratio of 22.7% suggests plenty of room for dividend growth.
Microsoft's gaming division struggled for a while. However, the acquisition of Activision Blizzard, which closed in 2023, has broadened its gaming portfolio, and is expected to boost long-term profitability. With gaming becoming a more important component of digital entertainment, Microsoft is well-positioned to capture a larger share of this expanding market.
Recently, Microsoft updated its first-quarter fiscal 2025 guidance to reflect changes in its segment structure. Specifically, the company anticipates a 50% increase in Productivity and Business Processes segment revenue, while Intelligent Cloud segment revenue could fall by 2% or remain flat. The More Personal Computing segment's revenue is expected to fall by around 9% on average.
Analysts tracking Microsoft stock expect revenue and earnings to increase by 13.8% and 11.6%, respectively, in 2024. Earnings are expected to further grow by 16.1% in 2025.
What Does Wall Street Say About Microsoft?
This month, many analysts reiterated their "buy" ratings on Microsoft stock. Morgan Stanley's Keith Weiss, who has set a price target of $506, is optimistic about Microsoft following the recent re-segmentation.
Weiss believes the new segment changes provide a clear picture of Azure's growth trajectory. He rates these "re-segmentation and growth dynamics as positive indicators of Microsoft's ability to innovate and drive revenue across its product suite."
Additionally, BMO Capital analyst Keith Bachman maintained a “buy” rating, with a price target of $500. Bachman believes that AI's long-term growth potential justifies Microsoft's premium valuation.
However, some analysts remain skeptical. Guggenheim analyst John DiFucci reiterated his "neutral" rating on MSFT, taking recent segment changes with a grain of salt. The analyst believes that while Microsoft remains an investor favorite, the recent changes make Microsoft's business model “more opaque, or a blacker box (due in part to a lack of historical data).”
Overall, on Wall Street, Microsoft stock is a “strong buy.” Out of the 39 analysts covering MSFT, 35 rate it a “strong buy,” three recommend the stock as a “moderate buy,” and one suggests it is a “hold.” The average price target stands at $499.58, which implies about 18% potential upside from current levels. Furthermore, the Street-high target price is $600, which suggests the stock could climb by 41.8% in the next 12 months.
Microsoft stock appears to be a little expensive, trading at 30 times forward earnings for 2025. However, given its leadership in cloud computing, AI innovation, and gaming, the stock makes for a good long-term investment.
The Bottom Line on MSFT Stock
Overall, Microsoft stands out as a good investment because of its diverse revenue streams, strong financials, and strategic initiatives in key growth markets. Furthermore, its consistent dividend payments make it an attractive income stock. For those seeking a well-rounded tech investment, Microsoft stock remains a strong contender for long-term growth and stability.
On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
