Is It Too Late To Buy Microsoft Stock?
Microsoft (NASDAQ: MSFT) started fiscal 2022 by exceeding profit and revenue estimates. This pushed up its shares the following trading day, and Microsoft shares are now selling at record highs, hitting a market cap of $ 2.5 trillion.
This leaves Microsoft and Apple fight to claim the largest market capitalization in the world. Knowing this, investors might naturally start to wonder if it’s too late to buy this tech giant.
Microsoft’s massive growth
Microsoft is not a cheap stock, the price / earnings (P / E) ratio stands at 37. Although far from an all-time high, it has risen significantly from the multiple of 15 earnings where it was when Satya Nadella became CEO in 2014. Moreover, while it sells for less than its cloud competitor Amazon (NASDAQ: AMZN), which supports a P / E ratio of around 60, it has become more expensive than Apple and Alphabet, both of which sell for around 30 times the profit.
Additionally, Microsoft generated $ 45.3 billion in revenue in its first quarter of fiscal 2022. This is a 22% increase from the same quarter last year. Its generally accepted accounting principles (GAAP) profits of $ 20.5 billion jumped 49% from levels a year ago. As its cost of revenues jumped 24%, slower growth in operating expenses and a $ 3.3 billion tax benefit from the transfer of intangible properties helped boost profits. Without this benefit, earnings would have increased by 24%. Revenue and profits helped the company generate $ 18.7 billion in free cash flow, 30% more than the quarter last year.
Similar successes prompted investors to bid higher on Microsoft shares during Nadella’s tenure. Since taking office as CEO, Microsoft stock has risen nearly 800%. Over the past year, it has jumped almost 55%.
Why Microsoft could continue to progress
Much of its success relies on the company’s success in the cloud. Grand View Research, which estimated the market size to be around $ 369 billion in 2021, predicts 19% compound annual growth for the industry through 2028. Microsoft has skillfully capitalized on this market. Its smart cloud division increased revenue to $ 17 billion, a 31% year-over-year gain. Microsoft remains the second player in cloud infrastructure, behind Amazon, a pioneer in the cloud industry. Amazon claims about 32% of the market, compared to 19% for Microsoft’s Azure, according to ParkMyCloud (a Software-as-a-Service IT management platform).
Yet the cloud has become a significant force in many areas of the business. Its productivity and process division, which transformed Office into a cloud-based product through Microsoft 365, had $ 15 billion in revenue. This represents an increase of 22% over the past 12 months. Even the relative laggard among divisions, Plus Personal Computing, increased revenue by 12% in that period to $ 13 billion. Nadella added when announcing first quarter 2022 results that the pandemic has caused a structural shift in demand for PCs, which should bode well for sales of Microsoft’s Windows 11 operating system.
In addition, investors will be hard pressed to find a stronger balance sheet than Microsoft’s. The company has a cash position of just under $ 130.6 billion. This means that he could pay off his $ 53.3 billion debt and still have considerable liquidity to make the necessary investments. This cash flow also enabled Microsoft to return nearly $ 10.9 billion to shareholders in the form of dividends, up 14% from the quarter last year. The annual payout of $ 2.48 only earns around 0.8%, a level that likely won’t entice investors to buy Microsoft. But, given the free cash flow generated during the quarter, the payment remains affordable for the business.
Investors still have time
Despite a record stock price and massive market cap, investors should consider Microsoft. True, Amazon continues to dominate the cloud market. Nevertheless, Microsoft has become its most formidable cloud competitor. Additionally, with a relative return of Windows and all divisions increasing revenue at double-digit rates, profit levels and the share price may continue to rise over time.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.