Following a big move higher in Microsoft's (MSFT 1.44%) stock in 2023 and a 7% run-up already this year, the tech giant now commands approximately a $3 trillion market cap. But is the tech company really worth this much?
Should shareholders be taking their profits or holding on for more potential long-term gains? Let's explore whether Microsoft looks like a buy, sell, or hold after rising more than 65% over the past year.
Firing on all cylinders
No wonder investors have been piling into Microsoft stock. The company has been firing on all cylinders.
Revenue in its most recently reported quarter (the first quarter of fiscal 2024) rose 13% year over year to $56.5 billion. Even better, earnings per share (EPS) soared 27% to $2.99. These results were fueled by a 19% rise in revenue in the company's biggest segment, "intelligent cloud," and 13% and 3% respective increases in "productivity and business processes" and "more personal computing" segment revenue.
The huge growth in Microsoft's intelligent cloud segment is what really has investors excited. Within the segment is the company's high-margin cloud computing service, Azure.
Azure and other cloud services revenue rose 29% year over year. This portion of Microsoft's business is a boon for the stock, providing a powerful growth catalyst via a reliable income stream from a very "sticky" product in which many enterprise customers heavily invest.
With momentum like this, Microsoft looks well-positioned to keep growing revenue at double-digit growth rates during the second half of fiscal 2024 and likely for at least the next few years, as well. More importantly, outsized growth rates in the company's more lucrative intelligent cloud segment mean the company's operating margin could expand further over the long term. Perhaps this is why the consensus analyst forecast calls for Microsoft's earnings per share to grow at an average compound annualized growth rate of 15% over the next five years.
Valuing Microsoft stock
Given Microsoft's incredible momentum and its potential for substantial earnings growth over the next five years, investors should think twice before they sell the stock. Not only is the company's business doing well, but the stock's valuation isn't exorbitantly high. Trading at 39 times earnings and 36 times forward earnings (analysts' average forecast for earnings per share over the next 12 months), shares definitely aren't cheap -- but they're arguably not overpriced.
Let's also not forget that Microsoft pays shareholders a nice dividend. While the company's dividend yield of 0.8% is relatively low, it increases its payout yearly. Indeed, it increased it by 10% last year.
More importantly, there's likely plenty more dividend growth to come. Earnings momentum and a low payout ratio of just 26% create a good setup for a high likelihood of more robust dividend growth in the coming years.
Overall, Microsoft stock looks like a hold at its current valuation. Sure, shares could pull back after such a big run-up, but the long-term thesis for holding the stock looks very strong. With double-digit annualized earnings growth likely to materialize for the next three to five years, the software giant looks like it will be able to live up to the market's high premium for the stock.
Investors will get an update on how well the company is doing next week. Microsoft will report its fiscal second-quarter results after market close on Tuesday, Jan. 30. Investors should look for the company's total year-over-year revenue growth rate to remain in the low teens (or better) to continue justifying the stock's current valuation.
