Even among the pool of soaring growth stocks, Microsoft (MSFT 1.21%) stands out as an outsized winner in this market. The software giant, which sports a $2.8 trillion market capitalization, has gained 60% so far in 2023, compared to a 17% boost for the S&P 500 and a 35% spike in the tech-heavy Nasdaq Composite Index. Who says it's impossible for huge businesses to deliver market-beating returns?
Yet investors are understandably concerned that Microsoft's biggest stock gains are in the past. And shares are priced at a higher premium today than they were even in early 2023. With those factors in mind, let's look at whether the tech giant is still a good place to park some cash for 2024 and beyond.
Beyond the hype
It's clear that artificial intelligence (AI) is a big catalyst driving the stock higher in 2023. CEO Satya Nadella has mentioned the emerging tech in each of the last few earnings updates, giving it top billing as a growth avenue over the next few years.
"We are rapidly infusing AI across every layer of the tech stack," Nadella said in late October.
NASDAQ: MSFT
Key Data Points
The good news is that investors aren't simply relying on hype around AI to support the bullish-growth thesis. Microsoft is already getting concrete benefits from the tech, which is boosting the value of its cloud services and lifting demand for productivity software. The cloud segment expanded at a blistering 24% rate last quarter, and executives said profitability rose directly because of AI demand.
There's more to like about Microsoft's huge portfolio, too. Shareholders are exposed to many growth niches by owning this one stock. These include cybersecurity, video games, and consumer tech devices. That diverse exposure helps keep overall sales rising even when parts of the portfolio are shrinking.
Financial strength
Owning Microsoft stock puts some impressive financial strength in your portfolio. The company earned $27 billion of operating profit last quarter alone, up 25% year over year. That result translated into an over-40% profit margin -- well ahead of Apple's 30% rate.
AAPL Operating Margin (TTM) data by YCharts.
This software-as-a-service business is also sitting on nearly $150 billion of cash holdings that are becoming more valuable as interest rates rise. Microsoft is on a tear when it comes to cash flow, having generated over $30 billion of operating cash in the past quarter alone.
Figures like that help explain why management felt it could easily afford a 10% boost in the dividend payout this year following a 10% hike in each of the last five years.
Take the leap
The biggest risk, then, is that investors will overpay for this highly efficient business. That's a real concern, given that Microsoft's price-to-sales valuation has ballooned to 13 in recent weeks from below 10 at the start of 2023. Apple is available for a relative steal at 8x revenue.
The same gap holds on the price-to-earnings (P/E) ratio. Microsoft shares cost 36x the past year's profit, while Apple is valued at 32x earnings.
Cautious investors might want to watch the tech-giant's stock for a better price in the coming months. Yet it's unlikely that you'll regret starting at least a small position here. Microsoft is among the most diverse tech stocks on the market, has a huge global sales footprint, and boasts a long record of stellar capital allocation.
The company's growing dividend payment provides instant income to buffer your returns, as well. Sure, the high valuation raises the risk of a stock-price drop during a market downturn. But it also reflects concrete benefits for investors willing to hold this growth stock over the long term.
