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3 Reasons Microsoft Is a Great Growth Stock

By John Ballard - Feb 2, 2021 at 12:00PM

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Keep investing simple by socking some money away in this awesome tech stock.

Making money in stocks doesn't have to be difficult. It's a lot easier to do when a household name like Microsoft (MSFT 2.03%) is still cranking out stellar operating results every quarter. The Redmond, Washington, company turned in another doozy of a quarter last week, with revenue up 17% and earnings per share surging 34% year over year. 

Likewise, the stock is up 43% over the last year, after more than quadrupling over the last five years. Here are three reasons why this growth stock should continue delivering market-beating gains far into the future.

Microsoft Xbox Series X and Series S consoles.

Image source: Microsoft.

1. Office and Xbox continue to grow

The productivity and business processes segment posted solid results over the last two years, with revenue growing 13% and 15% in fiscal 2020 and fiscal 2019, respectively. The transition of Office to a subscription service has worked wonders for Microsoft's core software business. In the fiscal second quarter, segment revenue growth remained consistent, growing 13%, or 11% excluding currency changes.

Microsoft now has 47.5 million consumer subscribers to Microsoft 365, up 28% year over year, where the company bundles Word, Excel, and other productivity software into a single subscription plan. 

Gaming is another consumer business that is firing on all cylinders right now. Xbox content and services revenue grew an astonishing 40% year over year. Even more impressive was Xbox hardware, where the November launch of the Xbox Series X and Series S was the most successful in company history, sending game hardware revenue up 86% year over year. 

Gaming makes up less than 10% of Microsoft's total revenue, but the next five years look very bright for the Xbox business. The Xbox Game Pass subscription service now has 18 million subscribers, but it's growing rapidly, with 3 million new members added in the last quarter alone.  

Management sees significant growth opportunities for gaming and consumer software services, as the shift to a subscription model in both businesses continues.

2. Cloud services

The most important reason to invest in Microsoft is growth in the cloud. Microsoft Azure experienced a small acceleration in growth last quarter, with revenue increasing by 48%, excluding currency. One analyst expects Azure to exceed both Office and Windows in annual revenue by next year. 

Demand for cloud infrastructure services is in more demand than ever, as organizations look for more digital solutions in a post-COVID-19 world. Azure is one of only a few cloud service providers that have the global scale to serve large corporate customers, which puts Microsoft in a solid competitive position against other cloud service providers.  

Microsoft continues to expand its cloud footprint globally, recently announcing seven new data centers in Asia, Europe, and Latin America. Microsoft spent $5.4 billion in capital expenditures in the last quarter to support growing global demand and customer usage of cloud services. That level of investment signals more growth ahead.

3. Free cash flow and dividends

Microsoft's lucrative software business has churned out high profit margins and free cash flow for many years. Free cash flow improved by 17% in the last quarter, bringing the total to $50 billion over the last four quarters. That level of cash generation makes Microsoft a great dividend stock, too.

Over the last 10 years, the quarterly dividend has risen from $0.13 per share to $0.56. That brings the annual payout to $2.24 per share, providing investors a dividend yield of 0.94% at the time of writing. 

The software giant is winning big across consumer software, cloud services, and gaming. It's established, dominant, and extremely profitable. That's why Microsoft is the perfect tech stock for any investor's portfolio.


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