The speed at which the tech industry moves makes it hard for almost any business to create an enduring competitive position. Microsoft (MSFT +0.04%) is a major exception, as evidenced by its multidecade ride to a market capitalization that's now well above $2 trillion.
In the three years ended in late September, shareholders have seen some wild swings in Microsoft's stock valuation. The price has gone from $200 per share to $350 per share, and the software giant is now sitting a bit below that all-time high, partly thanks to a recent sell-off in the tech-heavy Nasdaq Composite index.
There's no surefire way to know exactly what will happen to the stock over the next few years. But Microsoft's growth strategy and its recent momentum provide some great hints in that regard.
For Microsoft, it pays to be diversified
It is clear from the company's recent results that it pays to have a large, diverse tech business. While a few key parts of Microsoft's portfolio shrank in fiscal 2023 (ended June 30), notably its consumer devices and PC businesses, overall revenue rose 11% after currency exchange rate swings are accounted for.
NASDAQ: MSFT
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That diversity should serve shareholders well over the next few years. A cyclical rebound in those depressed niches will arrive at some point, and in the meantime, Microsoft can count on more in-demand products like its cloud services, cybersecurity, and digital transformation segments to drive sales higher. Most Wall Street pros project that revenue will rise by about 5% in fiscal 2024 to cross $222 billion.
Microsoft is riding the AI boom
While there's no telling which way the economy will shift in the coming quarters, it's highly likely that Microsoft will benefit from the artificial intelligence (AI) boom in some critical ways. Management isn't satisfied with just participating in this move. "We remain focused on leading the new AI platform shift," CEO Satya Nadella told investors in late July.
AI is already boosting the value of many of Microsoft's products, including its cloud enterprise services and cybersecurity divisions. The company has an advantage here in that it can deliver comprehensive business solutions while more focused players like Adobe cannot. Watch for Microsoft to try to press that advantage as it seeks to land more large enterprises and expand its existing contracts.
Cash and profits
There's an excellent chance that Microsoft will set new profit records in a few years. It achieved this result in fiscal 2023, after all, even as consumer and IT spending rates slowed. Investors can expect to see strong cash flow and earnings, given that the tech giant already excels in these two metrics. Operating cash flow was a blazing $88 billion this past year and operating profit landed at about the same level. Both figures translate into margins topping 40%.
That success helps explain why Microsoft announced another 10% increase to its dividend payment, its second straight double-digit hike. Management sees plenty of room to deliver more cash returns through dividend payments and stock repurchases, even as the company leans into growth investments around AI.
The software stock's valuation is elevated, but investors can still see solid returns from owning the stock over the next several years. You'll have to pay 11 times sales or 32 times earnings for the business, and both metrics are just below all-time highs. Microsoft's secure dividend and financial strength make it one of the best ways to gain exposure to exciting tech growth niches without taking on too much risk. Consider adding the stock to your portfolio today.
