Microsoft (MSFT -0.78%) has been on a tear in 2023, and its share price is now up roughly 28.5% across the year's trading. With a market capitalization of roughly $2.3 trillion, the software giant stands as the world's second-largest company and its stock has delivered a dividend-adjusted total return of roughly 240% over the last five years.
Does the technology titan still have room to run, or has its valuation become unreasonably stretched at current levels? If you hold Microsoft in your portfolio or are thinking of buying the stock, read on for a look at competing bullish and bearish takes from two Motley Fool contributors.
Image source: Getty Images.
Bull case: Thriving core businesses and huge AI potential
Keith Noonan: Microsoft has racked up incredible successes and transformed its business over the last decade.
The software giant has successfully transitioned its productivity software to a more profitable, more predictable subscription-based model. It's scored huge wins in the cloud-infrastructure space, with the company's Azure service second only to Amazon's offering and still gaining market share. It's also effectively managed its costs while pursuing growth initiatives. Thanks to these catalysts and factors, Microsoft stands as one of the world's most profitable companies, and it's safe to say the business has never been stronger.
Results for the company's third quarter, which ended March 31, came in significantly better than the market had anticipated. Microsoft posted roughly $18.3 billion in net income and per-share earnings of $2.45 on sales of $52.9 billion, while the average analyst estimate had guided for earnings per share of $2.23 on revenue of $51 billion. The company's 7% year-over-year sales growth and 10% growth might not look mind-blowing at first glance, but the performance highlighted just how sturdy the software leader is.
Even with revenue for the company's Windows OEM and devices units declining 28% and 30% in the quarter, respectively, Microsoft was still able to serve up solid growth. Azure continues to be a standout performance driver. Revenue for the intelligent-cloud segment, which houses the Azure business, grew 16% year over year to reach $22.1 billion, and Microsoft is positioned to benefit from secular tailwinds in the cloud services space.
Microsoft is also arguably the current leader in the red-hot artificial intelligence space. Through its $10 billion investment in OpenAI and partnership with the company, Microsoft has a big stake in ChatGPT and Dall-E. The software giant also has potentially revolutionary artificial intelligence services of its own being deployed and developed, and AI technologies could wind up giving powerful boosts to the company's key business units.
Valued at roughly 32 times this year's expected earnings, Microsoft undoubtedly trades at a premium, but the company is in great shape and poised to deliver for investors over the long term.
Future growth may be priced in
George Budwell: Admittedly, I am actually a full-on bull in regard to Microsoft stock. I'm extremely optimistic about the long-term prospects for the tech giant's cloud-based computing Azure platform, its business intelligence solutions unit known as Power Platform, and its top-shelf gaming franchise. That being said, there are some solid reasons investors may want to take a cautious approach with this highly diversified tech company -- at least in the near term.
First and foremost, Microsoft stock trades at a nosebleed premium. With an earnings yield of 3.11%, Microsoft's stock is expensive relative to many of its large-cap tech peers, as well as so-called risk-free assets like the 10-year U.S. Treasury note. Put simply, most of Microsoft's anticipated growth over the next year in cloud-computing, gaming, and business intelligence solutions appears to be baked in at this point. Making matters worse, an economic downturn could weigh on consumer discretionary spending later this year, an event that may dampen the tech giant's earnings power in core segments like advertising, devices, and gaming.
The good news is that Wall Street has remained fairly optimistic about Microsoft's near-term growth prospects, despite the possibility of an economic recession in the U.S. in the next year. After all, the consensus forecast among analysts covering the stock calls for top-line growth of over 11% in fiscal 2024. The core reason behind this rosy forecast is that the tech company's suite of products is considered vital to the operations of a wide variety of top-tier companies, making it less vulnerable to a possible economic downturn.
The bad news is that investors appear to have caught on to this fact, leaving little room for additional share price appreciation over the next 12 to perhaps 24 months. In short, Microsoft's stock may be trading close to its near-term ceiling right now.
Is Microsoft stock a buy right now?
There's no doubt that Microsoft is a great company with promising growth avenues ahead, but investors will have to decide whether its valuation profile fits their risk tolerance and portfolio goals. Some strong future performance is already priced into Microsoft's stock, and it's possible that macroeconomic conditions and other factors could lead to relatively muted returns over the next couple of years.
On the other hand, the company has fantastic competitive positioning and is on track to benefit from growing demand for cloud services, the rise of artificial intelligence, and other positive performance catalysts. For long-term investors seeking top blue chip tech stocks, Microsoft could make a great portfolio addition.
