Shares of Microsoft (MSFT 1.19%) have climbed about 33% year to date, rallying investors with a growing position in artificial intelligence (AI) and a business that appears to be far less vulnerable to economic headwinds than its peers. Meanwhile, the company is one of the biggest names in software, achieving record heights with brands like Windows, Office, Azure, and LinkedIn.
Despite a solid start to the year, the tech market has had a slight sell-off over the last three months. Microsoft's stock has tumbled 7% since July, with competitors like Apple and Amazon also facing declines. The dip in the market makes now an excellent time to learn more about a high-growth company like Microsoft and consider investing.
So here are three things smart investors know about Microsoft.
1. Massive earnings potential in AI
Microsoft got a head start in the AI market, investing $1 billion in ChatGPT developer OpenAI in 2019. The tech giant has since increased that figure by another $10 billion, acquiring a 49% stake in the start-up. The partnership has given Microsoft access to some of the most advanced AI technology available, allowing it to introduce AI-enabled features across its software lineup.
Microsoft said in July that investors should expect "gradual" revenue growth from its AI offerings in fiscal 2024. However, the dominance of Microsoft's various brands combined with OpenAI's technology suggests that could be an underestimation.
Data from Wedbush analyst Dan Ives shows there's been a "clear uptick in activity" on Microsoft's cloud service Azure since the introduction of AI tools. Ives believes the spike could produce revenue growth of 25% in Q1 2024 from Azure. The rise shouldn't be out of the realm of possibility, considering the cloud platform increased by 19% year over year in fiscal 2023 (ending in June).
In addition to Azure, Microsoft 365 will soon debut an AI assistant it calls CoPilot. The new feature will launch at $30 per month and be an add-on to a current subscription to the productivity service.
Microsoft's solid position in cloud computing and productivity software diversifies its role in AI and expands its options for monetizing its venture into the booming industry.
2. A bargain compared to other AI stocks
All eyes have been on chipmakers as the AI market has blown up this year. As a result, Nvidia and Advanced Micro Devices stocks have skyrocketed around 198% and 59% since Jan. 1, respectively. These companies are developing hardware that is crucial to building AI models. However, recent rallies have made their stocks expensive compared to Microsoft, with the Windows company arguably having more to offer over the long term.
Data by YCharts
The chart above compares the forward price-to-earnings ratio (P/E) of some of AI's most prominent players. An undervalued stock will generally boast a P/E of 20 or below, with Microsoft the closest to that figure. As a result, shares of Microsoft offer more value than any of these AI stocks. Yet its substantial stake in OpenAI and dominance in other areas of the market indicate it has the same or more earnings potential in the lucrative industry.
Microsoft's more gradual stock rise throughout the year and consistent earnings growth have played to its advantage. Consequently, it could have more to offer investors over the next year, as expected earnings growth for its peers is likely already priced into their shares.
3. Microsoft has 19 consecutive years of dividend growth
Microsoft offers one of the best dividends in tech, having provided investors with 19 straight years of dividend growth. The company's cash amount increased from $0.08 in 2003 to $0.68 in 2022. Then last month the tech giant announced another raise, increasing its dividend by more than 10% to $0.75.
While Microsoft's dividend yield of 0.87% might sound minuscule compared to those of leading dividend stocks like Verizon, it's significantly higher than those of its competitors. For instance, Amazon and Alphabet have no dividends to speak of. Meanwhile, Apple's dividend yield is 0.56%.
Moreover, Microsoft's steady dividend growth is an excellent indicator of management's confidence in its financial future. The company is on a promising trajectory and feels secure enough to offer more to shareholders. Additionally, a consistently expanding dividend makes up for the low yield, with reliable stock growth making the company an attractive long-term investment.
