While many investors might assume that Microsoft stock has already outperformed in terms of long-term investments, with its value up more than 35% year-to-date, they would not be completely wrong. However, it is essential to recognize that the technology arena has seen a solid rebound in 2023 after facing challenges in 2022.
Despite Microsoft’s proximity to its historical highs, the company maintains its appeal as a long-term investment. This view stems from Microsoft’s robust position in several areas of expansion, such as artificial intelligence, cloud computing, video games, and many other opportunities.
Microsoft’s strong quarterly results
Microsoft reported upbeat quarterly results for the fourth consecutive quarter, beating consensus estimates. Fourth-quarter adjusted earnings per share grew 21% year-over-year to $2.69 per share. In addition, the company’s strong profit margins are attracting investors, with a gross margin of 70% and an operating margin of 43%, considered top-notch in the technology sector. Operating income rose 21% to $24 billion, and net income grew 23% to $20 billion.
Free cash flow also grew 12% year-on-year to $19.8 billion. Despite these positive results, management has indicated that growth in artificial intelligence will be gradual and that capital expenditures will remain high. For the full year, revenue increased 11% in constant currency to $212 billion, and operating margins were close to 40%.
Over the past six years, Microsoft’s revenue has more than doubled from $97 billion in fiscal 2017 to $212 billion in fiscal 2023. Profits have also nearly tripled, reaching $72 billion over the same period. These results reflect the strong business fundamentals and sustained growth trajectory that Microsoft has maintained over the years.
Dual growth opportunity
Artificial Intelligence (AI) is emerging as a key growth driver for technology companies globally. According to Next Move Strategy Consulting, the AI market is expected to reach $2 trillion by 2030, with a compound annual growth rate of 33%. In this context, Microsoft is in an advantageous position by supporting OpenAI and its ChatGPT technology, integrating it into products such as Bing, GitHub, Excel, and Azure.
Following his successful track record of early adoption of Internet technology in the 1990s, Microsoft’s current CEO Satya Nadella likens AI to an unstoppable “tidal wave”, similar to the Internet phenomenon at the time. Nadella suggests that AI will have as significant an impact in the 2020s as the Internet had in previous decades.
The collaboration with OpenAI allows Microsoft to stay at the forefront of AI innovations, and its portfolio of AI-powered products is expected to grow in the coming quarters, contributing to the company’s revenue and profits. But in addition to its focus on AI, Microsoft is experiencing rapid growth in cloud computing. The growing demand for cloud services as a result of AI adoption benefits the company, whose intelligent cloud segment already accounts for 43% of total revenue.
In the latest quarter, revenue from cloud services, such as Azure and others, increased 26% year-over-year. Azure Arc, a Microsoft cloud service, has seen significant growth in customer acquisition, up 150% year-on-year. In addition, Microsoft’s potential acquisition of Activision Blizzard could further diversify its revenue streams should the $69 billion deal materialize.
Is Microsoft stock a buy?
The projection of the tech giant’s stock value estimates its average target price to be $391.52, which would indicate a potential upside of 21.2% from its current value. The financial community on Wall Street shows evident optimism towards Microsoft shares, reflected in its “Strong Buy” rating. This rating is supported by 32 buy, two hold, and one sell recommendations.
Mairs & Power Growth Fund, an investment advisor, published the investor letter in which it discussed Microsoft and made the following comment.
Regarding stock selection in the first half, Nvidia was a massive outperformer, up 189.54%. Amazon and Microsoft Corporation were also positive contributors, up 55.19% and 42.66%, respectively. All three stocks benefited from a renewed interest in growth stocks by investors in the first half of the year. Microsoft (MSFT) was another positive contributor to performance in the first half.
The company continued to take share in cloud computing. Its strong relationships with customers, as well as knowledge of their businesses, differentiates its offering, which is also helped by leading investments in AI. We expect the company will continue to integrate AI tools into most of its productivity suite of software in the not-too-distant future. This should help with employee productivity and the labor constraints of most of its customers.
Microsoft’s long-term growth outlook is supported by its presence in diverse sectors such as AI, cloud services, and gaming. The expansion of its AI services and growing demand for cloud computing suggest an increase in stock value in the coming years. Considering these trends, investing in Microsoft stock at present may be a good plan to maintain a long-term view.
What’s your opinion, do you think Microsoft’s outlook is as positive as it seems? Can you think of any roadblocks that might appear along the way?
Stay up to date with the latest news of the financial world with our NewsFlight newsletter.
(Information in this post is for general informational purposes only. It cannot and should not be considered as suggestions or recommendations regarding investing or financial decisions.)
