During his long and distinguished investing career, Berkshire Hathaway CEO Warren Buffett has readily admitted to having trouble comprehending some of the world's most recent technological advancements. For years, the legendary investor avoided technology stocks altogether, explaining that he prefers "simple businesses." He said, "If there's lots of technology, we won't understand it."
In recent years, however, Buffett and his money managers have invested in several technology titans, and some are well-positioned to benefit from recent advances in artificial intelligence (AI). While Apple is undoubtedly one of Buffett's favorite investments, it isn't the only holding poised to reap the rewards of AI.
Image source: The Motley Fool.
Buffett has a little secret
Through its ownership of specialty investment company New England Asset Management, Buffett has a secret portfolio of stocks that don't appear in Berkshire Hathaway's quarterly regulatory filings with the Securities and Exchange Commission (SEC). Through this avenue, Buffett owns a sizable stake in Microsoft (MSFT 0.25%).
To close out the second quarter, New England Asset Management owned nearly 45,000 shares of Microsoft stock, a stake worth roughly $15 million. Excluding preferred stock and exchange-traded funds, Microsoft is the asset manager's largest position, at more than 2% of its total holdings.
The choice isn't surprising, given the company's history. Over the past 10 years, Microsoft stock has gained more than 850% (as of this writing).
Let's look at a few of the reasons to invest in Microsoft stock now.
A broad and expanding customer base
The economic challenges of the past year weighed on many companies, and Microsoft wasn't spared. Yet despite the impact of the worst downturn in more than a decade, Microsoft's diverse customer base helped the company deliver solid growth.
For its fiscal year 2023 (ended June 30), Microsoft generated revenue of $212 billion, up 7% year over year and 11% when excluding the impact of foreign currency exchange rates. Adjusted earnings per share (EPS) of $9.81 also increased 7%.
Helping fuel the company's growth was the diversity of its product offerings. To close out the year, its intelligent cloud segment -- led by Microsoft Azure -- grew 17% in constant currency, while its productivity and business processes segment grew 12%.
There were challenges, however. The more personal computing segment fell 3% year over year as the personal computer (PC) market endured its worst slump in history. Global PC shipments declined 15% in 2022, eventually falling nearly 28% in the fourth quarter, according to Counterpoint Research.
This helps illustrate that the diversity of Microsoft's offerings helped the company continue to grow, despite the worst economic headwinds since 2008.
NASDAQ: MSFT
Key Data Points
A rock-solid balance sheet and a consistent and growing dividend
Having sufficient reserves to weather an economic storm can sometimes be the difference between success and failure -- and Microsoft has a rock-solid balance sheet that gave the company plenty of flexibility to withstand the challenges of the past year.
When it closed out its fiscal 2023 fourth quarter (ended June 30), Microsoft had more than $111 billion in cash and short-term investments. If you subtract long-term debt and operating lease liabilities, there's more than $51 billion in net cash, so Microsoft has plenty set aside for a rainy day.
The company also has a long and distinguished history of rewarding shareholders -- and not just with consistent stock-price gains. The company began paying a dividend in 2004, and its track record over the preceding two decades has been striking. Microsoft's payout began at $0.08 per share but has soared an impressive 750% since then.
Just this week, Microsoft announced its latest dividend increase, boosting its quarterly payout by $0.07 to $0.75 per share -- an increase of 10%. What's more, Microsoft uses just 27% of its profits to fund the payout, so the company can continue growing its dividend for the foreseeable future.
Microsoft's AI connection
Microsoft bears part of the responsibility for kicking off the current AI gold rush. The company has reportedly invested $13 billion in ChatGPT creator OpenAI. It has since announced plans to integrate generative AI functionality into its search engine Bing and across a broad cross-section of its products and services.
That process has already begun. The company recently announced its soon-to-be-released productivity enhancement tool, Microsoft 365 Copilot.
So, Copilot can generate an update from the morning's meetings, emails and chats to send to the team; get you up to speed on project developments from the last week; or create a SWOT analysis from internal files and data from the web.
The company said it will charge $30 per user per month for most Microsoft 365 customers. Bing Chat Enterprise will be included at no additional charge for many users and will be offered as a stand-alone offering for $5 per user per month.
While that may not sound like much, consider this: Several Wall Street analysts estimate that these tools alone could generate incremental revenue of as much as $100 billion annually for Microsoft by 2027.
While estimates vary wildly, most experts agree that the AI market could be worth trillions of dollars. Cathie Wood's Ark Investment Management believes AI could represent a $14 trillion opportunity by 2030. More conservative prognostications from Morgan Stanley and Goldman Sachs peg the opportunity at $6 trillion and $7 trillion, respectively, by the end of the decade.
In any case, Microsoft is working diligently to secure its share of those profits.
The fine print
To be clear, Microsoft won't appeal to every investor, and -- as with every stock -- there are risks. Recent history shows the company isn't immune to the effects of the broader economy. Additionally, just because it has the early lead in monetizing its generative AI technology, there's the potential that these tools won't be as valuable as Microsoft thinks.
Plus, Microsoft stock isn't particularly cheap, selling for 33x earnings. This is higher than the price-to-earnings ratio of 25 for the S&P 500.
That said, given the company's long history of resilient growth, fortress-like balance sheet, consistent history of dividend payouts, and early start in the AI market, I would argue that Microsoft stock is a steal at this price.
