Microsoft (MSFT 1.82%) stock has turned many shareholders into millionaires over the past few decades. After all, the software giant's climb toward $3 trillion of market capitalization has been fantastic, punctuated recently by its overtaking Apple as the world's most valuable business. It pays well to be along for that kind of ride, even if you were relatively late to the growth party.
The software giant's business looks much different today than it did 25 years ago, and tech trends will surely change many more times over the next several decades. Yet, the big question for investors going forward is whether the stock can still produce market-beating returns, given Microsoft's lofty valuation perch today. Let's look at the factors that could make this stock a positive force in the long run for your retirement portfolio.
Size and diversity
While investors can't know which tech trends will dominate the industry in several years, they can feel reasonably confident that Microsoft will continue to be a leading player as those trends emerge. It already has excellent exposure to many growth niches, including cloud enterprise services, video games, cybersecurity, and artificial intelligence. That diversity also boosts its value to large customers, who are increasingly looking for a comprehensive software solutions provider.
Sure, you might see much faster growth by owning a specialist, like cybersecurity expert Palo Alto Networks, that is at an earlier chapter in its growth story. This maker of powerful firewalls and cloud security products is targeting many years of above-average sales gains ahead as more businesses look to protect their digital assets and workflows. Yet, Microsoft already has a valuable relationship with most of the world's largest enterprises. It's not a stretch to believe the software titan can build on that formidable market share position in the coming years and decades.
Resources matter
Microsoft's financial strength is another huge factor in its favor. The company is sitting on over $140 billion of cash as of late September. It generated $30 billion of operating cash flow in just the last quarter, too, as operating profit jumped a healthy 26% higher year-over-year.
MSFT Cash from Operations (TTM) data by YCharts. TTM = trailing 12 months.
A lot of value is conferred by those ample financial resources. All that cash means Microsoft can more easily survive a market downturn than its smaller peers. It can invest aggressively in tech innovations, as it has been doing with AI lately. And if it misses any emerging opportunity, it can use cash to fund acquisitions or partnerships that keep it in the leadership position in the next computing era. Most tech companies don't have anything approaching that level of flexibility.
Price and value
As you might expect, Microsoft's stock is priced at a premium that reflects most of the key advantages detailed above. An investor must pay over 13 times annual sales for its shares, which isn't far from the pandemic high that investors saw back in early 2022. In comparison, you could own Amazon for a relative steal of about 3 times revenue, although the e-commerce giant's profit margins aren't nearly as lucrative as Microsoft's.
Microsoft's high valuation and market capitalization mean investors' returns from here will necessarily be constrained. Yet, the stock could still play a positive role in a retirement portfolio that aims to crack the $1 million mark. Microsoft investors can expect the company to lead the tech shifts ahead while capitalizing on its entrenched position in the massive global software industry. In other words, the tech giant has a good shot at producing more millionaire shareholders in the coming decades.
