What happened
Shares of Microsoft (MSFT -0.75%) gained 55.3% in value last year, according to data from S&P Global Market Intelligence. That outperformed the 28.9% return of the S&P 500 index.
The stock's performance can be chalked up to a combination of stellar earnings growth and an increase in the price-to-earnings (P/E) ratio. Adjusted (non-GAAP) earnings increased 22% in fiscal 2019, which ended in June, with another 21% year-over-year increase reported for the first quarter of fiscal 2020.
The stock started the year trading for a P/E ratio in the low 20s but ended the year trading at 29.7 times earnings. That extra valuation premium boosted the stock's performance, too. Investors are particularly high on the company's growth prospects in cloud computing, where Microsoft Azure is now in second place behind Amazon Web Services.
Image source: Getty Images.
So what
Microsoft has substantial long-term growth opportunities in its Intelligent Cloud segment, as large businesses migrate data systems over to the cloud. Azure revenue surged 59% year over year in the fiscal first quarter, which followed 64% growth in the previous quarter. In its most recent conference call, Microsoft highlighted Novartis and Humana that recently chose Azure AI to power their data gathering and healthcare solutions.
The software giant is also seeing double-digit growth in Office 365 subscriptions, particularly on the commercial side. In the most recent quarter, Office 365 Commercial revenue was up 25% year over year.
Now what
Azure and Office 365 are two big growth engines right now. Investors should also keep an eye on LinkedIn, which has nearly 660 million users. Revenue from the social network continues to grow at a good clip, up 25% in the last quarter. Microsoft reported that LinkedIn had its highest level of engagement last quarter across the platform.
A sleeper opportunity is gaming, a segment that hasn't been growing lately for Microsoft but could see a revival over the next decade. Beyond the launch of the Xbox Series X game console this fall, Microsoft also stands to benefit from adoption of its Project xCloud gaming service that just launched public trials toward the end of last year. Cloud gaming is a multi-billion opportunity, and Microsoft's know-how with its Xbox gaming business and in-house game development studios could make it a major player in this burgeoning market.
Analysts are anticipating revenue growth to slow in 2020, but long term, Microsoft still has a lot to offer investors looking for a growth stock.
