Investors seem to be focused on Microsoft's (MSFT 0.22%) attractive qualities as 2023 draws to a close. The software giant's stock price is up over 50% through mid-December, easily beating the 38% increase in the Nasdaq Composite to date.
Bulls are in charge of the stock's path right now thanks to encouraging signs around enterprise tech spending, artificial intelligence (AI), and economic growth. But, like any stock, Microsoft could fail to deliver good returns for shareholders from here. Let's take a closer look at that bullish thesis and one major fact that could threaten investors' returns.
Buy Microsoft stock for the value
Microsoft's portfolio of software services is becoming more valuable to its customers, which is great news for its long-term growth outlook. It's true that much of this value is coming from the emerging field of AI, a potentially overhyped investing trend on Wall Street these days. Yet Microsoft is getting concrete benefits from AI, such as boosting productivity across areas like cloud enterprise services, cybersecurity, and personal computing.
Executives said in a late-October earnings update that the technology is a major factor behind the company's recent 23% growth in its cloud segment. Overall revenue rose 12% as its expanding divisions more than offset sluggish results in areas like computing hardware. "We are rapidly infusing AI across ... every role and business process to drive productivity gains for our customers," CEO Satya Nadella said. Those gains are also directly boosting Microsoft's profit margin.
Buy Microsoft for the profit margin
Many software-as-a-service companies generate relatively weak earnings, but that's not at all the case for Microsoft. In fact, this tech giant is among the most profitable large companies on the planet.
Gross profit last quarter landed at $40 billion, or 71% of sales. Operating income jumped 24% to reach nearly 50% of sales. These gains came despite a relatively tame growth environment and aggressive spending in areas like data centers and research and development.
MSFT Operating Margin (TTM) data by YCharts
Microsoft's cash flow is stellar, too, with over $30 billion of operating cash generated in just the past three months. As a result, management has the resources it needs to protect the tech titan's dominant market share. The company can also afford to raise the dividend steadily as well.
Sell Microsoft for the valuation
The main issue is that investors have to pay up for exposure to all of these positive factors. Microsoft shares are valued at nearly 13 times sales today, up from a price-to-sales ratio of 9 at the start of the year. An elevated premium like that raises the risk that you'll see underwhelming returns by overpaying for a business. You can own Apple -- which is admittedly less profitable and growing more slowly -- for 8 times revenue.
Still, Microsoft checks a lot of boxes as an attractive growth stock investment. With just one stock, you get exposure to multiple promising software niches including cybersecurity and cloud enterprise services. You also gain a big presence in the burgeoning field of generative AI and all the positive implications on the way for software and business productivity.
If the stock's price bothers you, consider watching for another pullback in the market or in the tech world. These happen frequently, and the next one could provide a more compelling entry point for this stellar tech business.
