The Dow Jones Industrial Average (^DJI 0.32%) has advanced 33% since entering a bull market in October 2022. But over the past five decades, the index returned an average of 172% during bull markets, and it realized those gains over roughly 60 months. That implies considerable upside in the next few years.
Of course, there is no guarantee the current bull market will follow the historical pattern, but the Dow Jones should still generate decent returns given that it tracks 30 blue chip (that is, high-quality) companies. Investors can position themselves to benefit from that upward momentum by purchasing shares of Microsoft (MSFT -1.28%) and Salesforce (CRM 0.20%) today.
1. Microsoft
Microsoft makes money in a variety of ways, but software and cloud services are the core growth engines, and the company enjoys a strong presence in both areas. Microsoft 365 is the most popular enterprise application suite in any category, according to Okta, reflecting a strong presence in office productivity, communications, and cybersecurity software. Microsoft is also the market leader in enterprise resource planning software.
Meanwhile, the company is gaining share in cloud computing. Microsoft Azure accounted for 24% of cloud infrastructure and platform services revenue in fourth quarter, up nearly two percentage points from the prior year. CEO Satya Nadella attributed those share gains to advantages in artificial intelligence (AI), telling analysts that "Azure offers the top performance for AI training and inference, and the most diverse selection of AI accelerators, including the latest from AMD and Nvidia, as well as our own first-party silicon, Azure Maia."
Microsoft reported strong financial results in the second quarter of fiscal 2024 (ended Dec. 31), beating expectations on the top and bottom lines. Revenue increased 18% to $62 billion and non-GAAP net income increased 26% to $2.93 per diluted share. Investors should bear in mind that Microsoft completed its $75.4 billion acquisition of Activision Blizzard during the second quarter, which added $2.1 billion to revenue, or four percentage points of growth.
That merger gives Microsoft control of popular video game titles such as Call of Duty, Overwatch, and World of Warcraft, which could certainly be a tailwind given that the company already accounts for 60% to 70% of cloud gaming revenue. That market is projected to grow at 45% annually through 2030. However, enterprise software-as-a-service (SaaS) and cloud computing are much larger markets, meaning Microsoft's ability to grow those business segments will have a much greater bearing on its future success.
On that note, the enterprise SaaS and cloud services markets are projected to expand at 14% annually through 2030, and Wall Street expects Microsoft to grow sales at the same pace over the next five years. However, the company could exceed that consensus estimate with help from AI.
Specifically, as the exclusive cloud provider to OpenAI, Microsoft not only benefits because ChatGPT runs on its infrastructure, but also because Azure customers can use the underlying models to build bespoke applications. Wells Fargo analysts think that could boost revenue by $15 billion in the future. Additionally, its new generative AI assistant Microsoft 365 Copilot could generate $10 billion in annual revenue by 2026, according to Piper Sandler analysts.
In any case, its current valuation of 14 times sales is tolerable. Investors should feel comfortable buying a small position in Microsoft today, with the understanding that it's a $3.1 trillion company. In other words, while I believe the stock can outperform the Dow Jones over the next five years, investors should have modest expectations.
2. Salesforce
Salesforce provides customer relationship management (CRM) software. Its product portfolio includes applications for marketing, sales, and customer service, as well as tools for application development, data integration, and analytics. Collectively, its platform helps businesses boost productivity and build customer loyalty.
Salesforce dominates the CRM market despite competing with software giants such as Microsoft and Oracle. It accounted for 22% of CRM spending through the first half of 2023, more than the next four companies combined, according to the International Data Corp. Salesforce achieved that success through years of insightful innovation and successful acquisitions, such that it now offers the "most comprehensive and feature-rich" CRM platform on the market, according to CFRA analyst Angelo Zino.
Salesforce looked strong in the fourth quarter. Revenue increased 11% to $9.2 billion because of particularly strong sales growth in data management and analytics products, and non-GAAP net income increased 36% to $2.29 per diluted share. Investors can expect similar momentum in the future. The CRM market is forecasted to compound at 14% annually through 2030 as businesses invest in digital transformation to reduce costs and improve the customer experience.
Salesforce also has incremental opportunities with Data Cloud and Einstein Copilot. The former is a customer data platform (CDP) that lets businesses unify data from any source and use it across the CRM platform. The latter is a generative AI assistant built on Data Cloud that can answer questions, summarize content, and automate tasks. Notably, consultancy Gartner recently recognized Salesforce as a leader in the CDP market, and CEO Marc Benioff says Data Cloud is the fastest-growing product in company history.
Wall Street thinks Salesforce will grow revenue at 10% annually over the next five years, but that figure leaves room for upside if the company merely maintains its CRM market share. Salesforce could also meaningfully exceed that estimate if it drives significant adoption of Data Cloud and Einstein Copilot. With that in mind, the current valuation of 8.5 times sales is a reasonable price to pay.
As a caveat, Salesforce and Microsoft are similar in that both stocks could beat the Dow Jones over the next five years, but I doubt either stock will crush the market during that period. In other words, any outperformance is likely to be modest. I mention that not to dissuade potential investors, but rather to explain that these are slow-and-steady stocks, not swing-for-the-fences stocks.
