/Microsoft%20Logo%20on%20Building.jpg)
Over the past 20 years, benchmark indices like the S&P 500 ($SPX) and Nasdaq 100 ($IUXX) have generated impressive returns of 259% and 374% (adjusted for dividends). However, Microsoft (MSFT) stock has far surpassed these gains, achieving a remarkable 1,370% increase, establishing itself as a top performer in the market.
These outsized returns have meant Microsoft is among the largest companies globally, valued at a market cap of $2.38 trillion.
Despite a challenging macro environment where investors are wrestling with elevated inflation levels and rising interest rates, MSFT stock is trading just 6% below all-time highs. Comparatively, the tech-heavy Nasdaq index is down almost 20% from record highs.
Let's see if the tech giant can continue to deliver market-beating returns for investors in 2023 and beyond.
Microsoft is a Well-Diversified Company
Founded in 1975, Microsoft develops and supports software, services, devices, and solutions for individuals and enterprises. Its three primary business segments include Productivity and Business Processes, Intelligent Cloud, and Personal Computing.
The Productivity and Business Processes segment offers products such as Office 365, LinkedIn, and Dynamics 365, in addition to Microsoft Teams, which is among the most popular collaboration platforms.
The Intelligent Cloud segment comprises public, private, and hybrid server products and cloud services that power developers and businesses.
Finally, the Personal Computing business includes the Windows OS, gaming, search, and news advertising.
These business segments have allowed Microsoft to increase its sales from $125.8 billion in fiscal 2019 to $198.27 billion in fiscal 2022 (ended in June).
It is a market leader in several verticals, which provides the company with a wide economic moat. For instance, Microsoft is the second largest public cloud company after Amazon (AMZN). Its cloud business has increased sales from $3.2 billion in Q1 of fiscal 2017 to $25.7 billion in Q3 of 2023. Moreover, the total addressable market for SaaS (software-as-a-service) is forecast to surpass $460 billion by 2028, providing Microsoft with enough room to fuel revenue growth.
In the last 12 months, Microsoft's sales have risen to $204 billion, allowing it to report a free cash flow of $57 billion, which indicates a margin of 27%. Armed with a cash balance of $104 billion and robust profit margins, Microsoft has the liquidity to reinvest in organic growth, improve shareholder value and pursue accretive acquisitions, all of which it has been doing successfully.
Microsoft spent close to $30 billion in capital expenditures in the last four quarters, which should drive the development of innovative products and solutions. It is also aggressively targeting acquisitions, as seen with a pending takeover bid for Activision Blizzard and a stake in OpenAI.
Microsoft also pays shareholders an annual dividend of $2.72 per share, which translates to a forward yield of just 0.85%. However, these dividend payouts have risen by 12.6% annually in the last 18 years.
Is AI the Next Growth Driver for Microsoft Stock?
Microsoft has already invested $13 billion in OpenAI, the parent company of ChatGPT, a platform that was arguably the fastest to attract 100 million users. As a result, the tech heavyweight now enjoys a first-mover advantage in one of the most disruptive technologies in the world.
A research report from Next Move Strategy Consulting estimates that the artificial intelligence market will touch $2 trillion by the end of 2030, unlocking another multi-billion-dollar revenue stream for Microsoft.
The rising demand for AI products should be a tailwind for public cloud companies as these platforms require massive computing power, fast networking, and storage.
During the recent earnings call, Microsoft CFO (Chief Financial Officer) Amy Hood emphasized, "We will continue to invest in our cloud infrastructure, particularly AI-related spending, as we scale with the growing demand driven by customer transformation. And we expect the resulting revenue to grow over time."
Microsoft has also integrated ChatGPT with several products, including Bing, a search engine. Right now, Google accounts for the majority of search engine traffic. But Bing, powered by ChatGPT, is well positioned to cannibalize Google's market share, driving Microsoft's digital ad sales higher by a considerable margin.
Is now a good time to buy MSFT?
Analysts tracking Microsoft expect the company to grow its sales by 6.6% to $211.3 billion in fiscal 2023 and 11.3% to $235 billion in fiscal 2024. Its adjusted earnings per share is forecast to improve from $9.21 in 2022 to $10.78 in 2024.
So, MSFT stock is priced at 10x forward sales and 30x forward earnings, which might seem steep given a sluggish global economy.
However, Microsoft is part of several rapidly expanding markets that range from AI to public cloud, gaming, collaboration, and digital advertising, making it one of the most compelling growth stocks today. And in the last six years, Microsoft has increased its sales by 13.8% yearly.
This morning, Jeffries analysts raised their price target for MSFT to $400 from $350, which is almost 25% higher than where the stock is currently trading.
On the date of publication, Aditya Raghunath 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.
