Microsoft (MSFT 1.82%) stock has crossed a major milestone. Its market capitalization passed $3 trillion in early 2024, making it the most valuable company on the planet. The software giant currently holds a small lead over Apple, giving shareholders bragging rights over the iPhone maker.
Microsoft stock has beaten the market over the past year, jumping 60% to roughly double the rally in the Nasdaq Composite since early 2023. But you'd be looking at much better returns if you held the stock for the past full decade.
Getting big gains
Microsoft stock was trading for around $38 per share in early 2014. At that valuation, you could have spent $5,000 in exchange for 130 shares of the tech giant. That position today would be worth about $52,000, translating into a 970% gain, or a 26% compound annual growth rate over 10 years. The S&P 500 rose 172% in that period, for context.
Satya Nadella had just taken over the CEO position from Steve Ballmer in 2014, and he singled out cloud services as a major growth goal for the company. That was a prescient call. The past decade has seen Microsoft transition most of its business into services instead of the one-time software purchases that had been its main revenue source. Its cloud enterprise division is massive today, mainly thanks to the Azure platform, which competes with Amazon's Web Services division.
Financial wins
The stock wouldn't have had such an epic run without the massive financial wins investors have seen in the past decade. Sure, the sales footprint is much larger today. Most Wall Street pros are looking for sales to land at $243 billion this fiscal year compared to $78 billion a decade ago.
Yet the news is even more positive around profits and cash flow. Microsoft generated $27 billion in operating income in just the past three months. That's the same profit level that took a full year to achieve back in 2014.
MSFT Free Cash Flow data by YCharts
In my view, cash flow is the single most telling metric in support of Microsoft's market-trouncing rally over the past decade. Annual cash production has more than tripled since early 2014 and is now approaching a record $70 billion. Microsoft is sitting on over $80 billion of cash holdings today, too, giving management flexibility to make bold investments and acquisitions in areas like artificial intelligence (AI).
The path forward
AI looms large as a likely growth avenue for the next decade. Nadella and his team have been pushing this tech aggressively for over a year, and now the company is transitioning into the execution phase. "We've moved from talking about AI to applying AI at scale," Nadella said in late January. Microsoft has noted some concrete benefits from the technology already, including higher demand for many Azure services and rising profitability. Investors will be watching for further improvements along these lines over the next several years.
Microsoft's massive size today limits its ability to post anything approaching the percentage returns that investors have seen since early 2014. Yet the business is well positioned to defend its huge market share in this highly profitable industry. As a result, it's likely that growth stock investors will still be happy to have this company in their portfolio in the years to come.
