Should You Hold Microsoft (MSFT)?

Despite being the largest company in the world by market capitalization, Microsoft (MSFT) isn’t resting on its laurels.

It wants to dominate AI, which it sees as the future of…well…everything.

The company was an early investor of OpenAI, dropping over $10 billion for a chance to partner with the hottest tech since personal computers.

Financial pros were heavily interested in the latest earnings call, according to our TrackStar data.

The company reported an impressive 17% revenue growth, well above the 10.5% 10-year average.

Shares are only up 14% year-to-date, only 3% better than the S&P 500.

And it’s tough to love a stock that trades at 37x earnings and 29x cash.

But does the company’s growth justify the share price?

Microsoft’s Business

Microsoft Corporation isn’t just a big name in tech; it’s a game-changer that’s constantly evolving to meet the future head-on. 

Most of us know the company for its groundbreaking Windows operating systems, Office productivity suite, and powerhouse Azure cloud services. 

The company strives to make things easier, more efficient, and accessible for everyone, whether you’re running a small business, leading a large corporation, or just trying to get more out of your day-to-day tech.

And with strategic acquisitions like LinkedIn and GitHub, as well as a huge investment in OpenAI, it’s clear they’re always thinking about the next big thing.

Here’s how Microsoft breaks down its business:

• Productivity and Business Processes (33% of total revenues) – This is where tools like Office, SharePoint, and Skype shine, helping people stay connected and get work done, no matter where they are.
• Intelligent Cloud (34% of total revenues) – It’s not just about storing files somewhere in the cloud. Microsoft’s server products and services are there to support businesses big and small as they navigate the complexities of modern IT needs.
• More Personal Computing (33% of total revenues) – This segment is all about the user experience, with products that range from Windows to Surface tablets and Xbox gaming, all designed to enhance the way we interact with technology.

Source: Microsoft Investor Presentation

The latest earnings from Microsoft are a testament to its growth, boasting a 17% increase in total revenues, hitting $61.9 billion. This spike is largely fueled by its thriving cloud business, especially Azure, as companies worldwide double down on digital transformation. 

With AI and machine learning increasingly baked into everything from cloud computing to productivity apps, Microsoft is not just keeping up with the times; it’s setting the pace.

Financials

Source: Stock Analysis

Microsoft has only had one year in the past decade where revenues declined YoY.

Otherwise, it’s averaged 10.5% over the last decade and 14% over the past five years.

Margins also expanded, with gross margins jumping 4% from 2019 to 2024, which flowed right down to profit margin.

Free cash flow margins remained constrained as Capex skyrocketed from $14 billion to almost $40 billion during that same period.

As we said, Microsoft isn’t resting on its laurels.

At the same time, the company has repurchased $20 billion in stock while paying $21 billion in dividends for a total yield of 1.2%.

While the company has $100 billion in debt, it also carries $80 billion in cash, giving it plenty of balance sheet flexibility.

Valuation

Source: Seeking Alpha

At its current price, Microsoft’s stock isn’t cheap.

It trades at 36x earnings and 29x cash, about 11% over its 5-year average.

However, competitors like Palo Alto Networks (PANW) and Block (SQ) trade at similar or higher multiples.

In fact, only Dell (DELL) is priced at what an investor might consider a discount. 

Growth

Source: Seeking Alpha

When we compare Dell to everyone else in this group, we see that you’re paying for a growth premium.

Palo Alto, Fortinet (FTNT), and Microsoft have all consistently grown sales in the teens or higher for the past several years.

And in each case, that’s translated to higher cash flow and, in most cases, profits.

Profitability

Source: Seeking Alpha

Microsoft’s margins dominate its peers in nearly every category except gross margin, which is still quite competitive.

And it’s because of those quality earnings that Microsoft reports high returns on equity, assets, total capital, and a decent free cash flow margin.

Our Opinion 7/10

While we love Microsoft, it’s trading at a premium in a market that’s already a bit frothy.

For now, we’d hold off on buying the stock until it pulls back to something more reasonable.

Yet, there’s no reason to sell if you own the stock.

Microsoft’s growth prospects are fantastic, with new revenue streams in AI and elsewhere opening.