Investors have some high expectations around Microsoft's (MSFT 0.22%) upcoming earnings report. In late January, the software company is likely to announce strong growth in its core cloud-services segment while talking up the impact that artificial intelligence (AI) is having across its business.
But investors might have already accounted for this good news in a stock that's now worth close to $3 trillion. Does Microsoft have more room to rise from that elevated perch? Let's take a closer look.
Pick a winner
Microsoft's exposure to several huge growth avenues is a major reason to like this stock. Like Amazon, the company has an enviable market share in enterprise cloud services with its Azure platform.
Yet you also get access to a cybersecurity business, a huge personal-computing software segment, and exposure to the attractive video game niche by owning shares of Microsoft.
This full package translated into $57 billion in sales last quarter, up 12% year over year. That double-digit spike came despite softness in a few of the company's main segments.
Look for CEO Satya Nadella and his team to highlight wins in cloud services in their report on Jan. 23. Most Wall Street pros are looking for fiscal second-quarter sales growth to accelerate to about 17%, landing revenue at $61 billion for the quarter.
Profiting from the shift
Much of the expected returns from the AI boom are theoretical at this point, but investors can already see a positive impact from the tech in Microsoft's financial results. Its showing up in rising demand for Azure AI services, for example.
"As customers select their cloud providers and invest in new workloads, we are well positioned to capture that opportunity as a leader in AI," Nadella said during a recent call with investors.
For the stock to keep rallying, Microsoft will need to show how these gains are translating into faster sales growth and rising profitability in 2024. The news has been positive in this arena so far. Gross profit margin is near a 10-year high at almost 70% of sales, and operating profit margin is well above 40% of sales.
Contrast that last figure with Amazon's 4% rate, and you can see why investors are so excited about Microsoft's long-term potential to generate profits.
Wall Street is looking for fiscal second-quarter earnings to jump 19% to $2.78 per share. Yet Microsoft has beaten expectations in each of the last four quarters, including with a 13% outperformance in the most recent period.
Where the stock goes from here
There's likely to be volatility in Microsoft's stock around the earnings report, but investors should try to tune out that noise and focus on the bigger picture instead. For this business, that means growth in the company's services segment along with an operating profit margin that keeps climbing toward 45% of sales.
Investors need to balance that good news against Microsoft's high valuation. You have to pay 13 times sales for this stock, compared to 8 times sales for Apple and 3 times sales for Amazon. It's possible that this premium will shrink in 2024, especially if the AI boom fails to live up to investors' high expectations.
But Microsoft's many growth opportunities and strong finances mean it should generate steadily rising earnings, making it a good fit in most growth stock portfolios.
