Microsoft (MSFT -0.45%) began fiscal 2022 by beating earnings and revenue estimates. This sent its stock higher the following trading day, and Microsoft stock now sells at record highs, achieving a market capitalization of $2.5 trillion.

This leaves Microsoft and Apple battling one another to claim the world's largest market cap. Knowing this, investors might understandably begin to wonder whether it is too late to buy this tech giant.

A woman holds up a plastic outline of a cloud.

Image source: Getty Images.

Microsoft's massive growth

Microsoft is not a cheap stock, the price-to-earnings (P/E) ratio stands at 37. While far from a record level, it has risen significantly from the 15 earnings multiple where it stood when Satya Nadella became CEO in 2014. Moreover, while it sells for less than its cloud competitor Amazon (AMZN -0.68%), which supports a P/E ratio of about 60, it has become pricier than Apple and Alphabet, which both sell for approximately 30 times earnings.

Furthermore, Microsoft brought in $45.3 billion in revenue in its first quarter of fiscal 2022. This represents a 22% increase compared with the same quarter last year. Its profits under generally accepted accounting principles (GAAP) of $20.5 billion surged 49% from year-ago levels. While its cost of revenue surged by 24%, slower growth in operating expenses and a $3.3 billion tax benefit from the transfer of intangible properties helped profits surge. Without this benefit, earnings would have risen 24%. The revenue and profits helped the company bring in $18.7 billion in free cash flow, 30% more than in the year-ago quarter.

Similar successes have induced investors to bid Microsoft stock higher during Nadella's tenure. Since he took over as CEO, Microsoft stock has risen by nearly 800%. Over the last year, it has surged by almost 55%.

MSFT Chart

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Why Microsoft may continue moving higher

Much of its success hinges on the company's success in the cloud. Grand View Research, which estimated the market's size at around $369 billion in 2021, forecasts 19% compound annual growth for the industry through 2028. Microsoft has adeptly capitalized on this market. Its intelligent cloud division increased its revenue to $17 billion, a 31% gain year over year. Microsoft remains the second-largest cloud infrastructure player, lagging only Amazon, which pioneered the cloud industry. Amazon claims about 32% of the market, versus 19% for Microsoft's Azure, according to ParkMyCloud (a Software-as-a-Service IT management platform).

Still, the cloud has become a significant force in many parts of the company. Its productivity and processes division, which has turned Office into a cloud-based product through Microsoft 365, reported $15 billion in revenue. This represents a 22% increase over the last 12 months. Even the relative laggard among divisions, more personal computing, increased revenue by 12% over that time to $13 billion. Nadella added on the first-quarter 2022 earnings call that the pandemic led to a structural shift in PC demand, and this should bode well for sales of Microsoft's Windows 11 operating system.

Additionally, investors will struggle to find a balance sheet more solid than that of Microsoft. The company holds a cash position of just under $130.6 billion. This means that it could repay its $53.3 billion in debt and still have considerable cash to make any needed investments. This cash position also left Microsoft in a position to return almost $10.9 billion to shareholders in the form of dividends, 14% more than in the year-ago quarter. The $2.48 annual payout yields only about 0.8%, not a level that will likely induce investors to buy Microsoft. But, considering the free cash flow generated during the quarter, the payout remains affordable for the company.

Investors still have time

Despite a record-high stock price and a massive market cap, investors should consider Microsoft. Admittedly, Amazon continues to lead the cloud market. Nonetheless, Microsoft has emerged as its most formidable cloud competitor. Also, with a relative comeback in Windows and all divisions growing revenue at double-digit rates, both the profit levels and the stock price can continue to move higher over time.