Microsoft (MSFT -2.45%) has survived and thrived through multiple technological waves. More than four decades after the release of the MS-DOS operating system, the company remains one of the biggest tech giants in the world. It has also been in the spotlight this year thanks to the company's relationship with ChatGPT and GPT-4 developer OpenAI.
The stock has also made long-term investors a lot of money through the years. But can it continue to do so going forward? I think so. Here are three reasons why Microsoft stock is a no-brainer to buy and hold.
1. Cash flow you can count on
Arguably the most important thing an investor should want from a business is the ability to generate strong and growing free cash flow. Without free cash flow, a company can't do the things needed to increase shareholder value. Microsoft delivers cash flow that you can count on.
In 2022, the company generated free cash flow of more than $65 billion. Microsoft used this massive amount in several ways, including funding its dividend program, buying back shares, and making strategic acquisitions. But churning out impressive free cash flow isn't anything new for the tech leader. Microsoft has grown its cash flow for a long time.
MSFT Free Cash Flow data by YCharts.
Sure, there have been a few dips along the way. However, Microsoft always returned to solid free cash flow growth within a relatively short period. The company has been able to do so in large part because of its server and office products and services, which together account for roughly 60% of its total revenue.
2. A key player in nearly every hot tech area
Name a hot area of technology, and it's a pretty good bet that Microsoft is a key player. There are three that I think could especially drive the company's growth for decades to come.
Microsoft's Azure cloud services business growth slowed in its latest quarter. However, this should only be a temporary issue. The cloud market remains a massive growth opportunity for Microsoft as organizations shift IT spending from on-premises to the cloud.
The accelerated adoption of artificial intelligence (AI) could provide an even bigger boost for Microsoft. We've already seen the renewed interest in the company's Bing search engine after the integration with OpenAI's GPT-4. That could be just the tip of the iceberg as Microsoft rolls out generative AI functionality throughout its suite of products.
I recently made the case that quantum computing is the most overlooked reason to own Alphabet stock. My view is that the same is true for Microsoft. The company touts its Azure Quantum as "the world's first full-stack, open cloud quantum computing ecosystem."
Microsoft is betting heavily on quantum computing. Zulfi Alam, the company's quantum corporate vice president, said last year, "Whoever develops a commercial quantum accelerator first will have a strong competitive advantage, along with their customers." Even if Microsoft isn't the first in this race, I predict that it will be among the leaders.
3. A strong management team
You've probably heard the old saying, "bet on the jockey, not the horse." With investing, considering both the horse (the underlying business) and the jockey (the management team) is important. We've already talked about Microsoft's underlying business, but the company also has a strong management team.
Satya Nadella's tenure as CEO of Microsoft has been remarkable. Since he took the helm in February 2014, the stock has delivered a total return of more than 750%. That's more than 4.5 times the S&P 500's total return during the period.
Nadella joined Microsoft in 1992. He headed up the company's cloud and enterprise group before being promoted to CEO. His business acumen and vision have played a major role in Microsoft's success.
In the company's latest quarterly update, Nadella said, "We will continue to pursue our long-term opportunity and innovation agenda with urgency while also raising the bar on our operational excellence." That's the message every investor should love to hear -- especially from a leader who has proven that he can deliver on his promises.
The biggest knock against Microsoft
Probably the biggest knock against Microsoft is its valuation. The company's shares are more expensive than several other major tech stocks. However, Microsoft's price-to-earnings multiple doesn't look so bad compared to the company's historical levels. More importantly, its long-term opportunities should enable Microsoft to keep up its winning ways over the next decade and beyond.
