The tech industry is booming, prompting a much-welcome recovery from the selloff the market experienced in 2022. Many of the biggest names in tech have enjoyed considerable stock price growth this year, suggesting it's not a bad idea to consider investing in the industry before it's too late.
As the world's second-most-valuable company, with a market capitalization of $2.5 trillion and a dominant position in tech, Microsoft (MSFT 1.75%) is an attractive option. The company's homegrown brands, including Windows, Office, Xbox, and Azure, have led to substantial market shares across multiple sectors and impressive financial growth.
However, a recent rally from investors bullish about Microsoft's prospects in artificial intelligence (AI) has made its stock a slightly expensive choice. So it's a good idea to understand the negative and positive aspects of the company. Here are the bull and bear arguments for Microsoft stock.
Bear: A slightly expensive option
Microsoft's stock has risen nearly 40% year to date, with its position as the biggest investor in ChatGPT developer OpenAI boosting investors' confidence. The rally is not unfounded as the artificial-intelligence (AI) industry is projected to expand at a compound annual growth rate of 37% through 2030. Meanwhile, Microsoft's partnership with OpenAI has allowed it to bring advanced AI upgrades to programs such as Word, Excel, Azure, and more. The success of these brands could see the company become a go-to for consumers and businesses seeking AI services.
Despite lucrative long-term prospects in AI, Microsoft's price-to-earnings (P/E) ratio of 36 indicates its business will need some time to live up to its current valuation. A typical P/E for the stock is around 20 to 25, with anything below considered a good value. As a result, Microsoft isn't too far off track. Comparatively, its biggest cloud competitor Amazon, has a P/E of 308.
The good news is the longer you hold Microsoft, the less its current P/E will matter. The company's stock has risen 233% in the past five years and 894% in the past decade. As Microsoft expands its AI offerings and other parts of its business, its stock could soar even further in the coming years.
Bull: Impressive financial growth
Alongside consistent stock growth, Microsoft has proven the strength of its business by delivering immense financial gains. The following chart illustrates how Microsoft's revenue and operating income since 2018 have been nearly double the same metrics for the world's most valuable company, Apple.
Data by YCharts
Microsoft is profiting substantially from its digital businesses, which tend to offer attractive profit margins and monster growth. Its productivity and business processes segment, which includes revenue from Office 365 subscriptions and LinkedIn earnings, reported an 18% rise in revenue in fiscal 2022, with operating income climbing 22%. Meanwhile, its intelligent cloud segment saw revenue and operating income increase 25% year over year.
The tech giant has proved its ability to use its software expertise to build a massively profitable business. In this respect alone, Microsoft's stock makes for a solid buy. However, when you factor in the company's potential in AI and its track record of profiting from its software, it could become one of the best growth stocks of the next decade.
Moreover, its history of long-term growth makes it a lower risk than popular AI stocks such as Nvidia, which has risen 189% in 2023 alone. Microsoft has a long history of dominance in software, with consumers unlikely to switch from its key products like Windows any time soon. With the future of AI so uncertain, a known quantity like Microsoft might be the best way to invest in AI now.
And with that, the bulls win this one. Microsoft stock is a screaming buy as it expands in AI and other industries.
