Under Satya Nadella’s leadership, Microsoft is striving to be a top-tier performer. Is it the right time to consider an investment in this stock? We are now halfway through 2023, and Microsoft (NASDAQ: MSFT) has emerged as one of the biggest victors with a staggering 41% increase in stock price year to date. It’s ranked third in performance among the 30-stock Dow Jones Industrial Average, trailing only Salesforce (with a 59% increase) and Apple (49% rise).
So, should investors jump aboard the Microsoft train or exercise caution? Let’s delve deeper to decide.
The Optimistic Outlook: Continuous growth on the horizon
The optimistic outlook for Microsoft relies heavily on immediate efficient execution and prospective long-term growth.
Starting with the immediate execution, Microsoft CEO Satya Nadella is steering the ship right, as demonstrated by the company’s recent financial results. In the last quarter (ending March 31, 2023), Microsoft recorded a revenue of $52.9 billion, a notable increase from $49.4 billion from the prior year. Furthermore, the net income experienced a 9% surge to $18.3 billion.
Microsoft’s Intelligent Cloud division, catering to commercial businesses and including its Azure service, alone contributed to $22.1 billion of the revenue. This signifies that Microsoft is successfully transitioning from a traditional commercial software producer to a leading cloud services provider, as per its immediate plan.
As for prospective growth, a recently publicized memo illuminates CEO Nadella’s vision for Microsoft for the next seven years.
The memo—made public during Microsoft’s federal court proceedings concerning its potential acquisition of Activision Blizzard—indicates the leadership’s goal to increase revenue by a minimum of 10% annually until 2030. This growth trajectory would allow Microsoft to exceed $500 billion in revenue by 2030, a significant jump from $207 billion generated over the past 12 months. If Nadella is successful in achieving or even nearing this target, Microsoft’s stock value will likely skyrocket.
The Cautious Perspective: Microsoft’s valuation is considerably high
If there’s a concern about Microsoft’s stock, it’s the valuation. The shares are not reasonably priced; they’re relatively expensive.
Whether considering the price-to-earnings (P/E) ratio or price-to-sales (P/S) ratio, Microsoft shares are significantly above their 10-year average. The shares trade at a P/E ratio of 36.6, not only about 20% above the company’s 10-year average P/E but also more than double the S&P 500’s long-term average (approximately 16). The P/S ratio of Microsoft shares is also high, trading at 12.2, over 60% above the company’s 10-year average of 7.5.
Should You Invest in Microsoft?
So, what’s the verdict on investing in Microsoft? Unquestionably, both the immediate and long-term future seems promising. The management is confident in growing its cloud business further and has set an ambitious goal to more than double its revenue by 2030.
Moreover, analysts anticipate short-term deliverables from the company. Revenue is expected to reach $211 billion this year (a 7% increase from the previous year) and to hit $235 billion (an 11% yoy rise) by 2024.
The overall prospects for Microsoft seem highly promising, given its impressive growth trajectory, dominant presence in the cloud services sector, and ambitious growth goals. Coupled with solid leadership under CEO Satya Nadella, these factors make a compelling case for investing in the tech giant’s stock. However, potential investors must weigh these factors against the company’s high valuation. With this balanced outlook, those considering adding Microsoft to their portfolio can make an informed decision based on their investment strategy and risk tolerance.
