As the second-largest company globally, Microsoft (MSFT 0.73%) gets a lot of attention as an investment. With its fingers in exciting areas like artificial intelligence (AI) and cloud computing, it's also an innovative company.
But does all of this add up to an investible company? After all, Microsoft makes up 6.7% of the S&P 500 and 9.7% of the Nasdaq 100, so many investors are already highly exposed to Microsoft through a basic index fund. Let's take a look.
Microsoft's business units are a mixed-bag
Microsoft splits its business into three units: productivity and business processes, intelligent cloud, and more personal computing. The division most investors focus on is intelligent cloud, which holds the honor of being the largest and the fastest growing. The star of this show is undoubtedly Azure, its cloud computing wing.
According to CEO Satya Nadella, Azure accounted for more than 50% of intelligent cloud's revenue for the first time, meaning it generated at least $12 billion in revenue while growing at a 27% pace. Cloud computing market leader Amazon Web Services' saw 12% growth to $22.1 billion, so Microsoft has a ways to go to catch up. Still, if Azure can grow at that pace, it's not too bad to remain in second.
NASDAQ: MSFT
Key Data Points
More personal computing is struggling right now. With it focused on consumer-facing products like laptops and gaming consoles, it's no surprise revenue fell 4% year over year. It did see one bright spot: Search and new advertising revenue was up 8%. That's huge for Microsoft investors, as it shows that its integration with ChatGPT on Bing attracts more advertisers.
Finally, productivity and business processes grew at a 10% pace, with office commercial and dynamics products leading the way. This segment is more business-focused, so seeing it perform at a market-average pace is a telltale sign for the economy that the consumer may be struggling (or at least not willing to buy expensive computing products), but businesses are doing just fine.
Overall, Microsoft grew revenue by 8% to $56.2 billion, and earnings per share (EPS) rose 21% to $2.69 in Q4 of FY 2023 (ending June 30). That's about par for the course for many companies in the market right now, so does that warrant a purchase?
Microsoft has a premium price tag on the stock
For FY 2024, Wall Street analysts expect 11% revenue growth combined with $10.98 in EPS, indicating 12% earnings growth. That's not a terrible projection, but it indicates business will pick up in the latter half of the fiscal year, as Microsoft is projecting 8% growth in Q1.
Still, that kind of growth may not justify Microsoft's stock's premium price tag.
MSFT PE Ratio data by YCharts
At 30 times forward earnings, it's far more expensive than the S&P 500's forward earnings multiple of 19.
With the bar for Microsoft much higher than for many of its peers, it must execute at a high level to maintain its premium valuation. But with its exposure to growing areas like cloud computing and AI, it wouldn't surprise me if it continues to perform well.
But with its premium valuation and market-average growth rate, I already own enough Microsoft stock through my exposure to index funds. I don't think it's worth loading up on more Microsoft stock if you have significant exposure to an index, whether in a brokerage account or a 401(k).
Microsoft is a great company, but it doesn't warrant additional shares until its growth rate picks up or its valuation comes down.
