Is It Too Late to Buy Microsoft Stock?

Microsoft (MSFT -0.56%) posted its latest earnings report on April 25. For the third quarter of fiscal 2024, which ended on March 31, the tech giant's revenue rose 17% year over year to $61.9 billion and beat analysts' expectations by $971 million. Its earnings per share (EPS) grew 20% to $2.94 and cleared the consensus forecast by a dime.

Those headline numbers were impressive, but is it too late to buy its stock after Microsoft's near-50% rally over the past 12 months?

Its cloud growth is still accelerating

Microsoft operates three main businesses: the Intelligent Cloud division, which houses its cloud and server products; the Productivity and Business Processes division, which handles Office, Dynamics, and LinkedIn; and the More Personal Computing division, which includes its Windows, Xbox, Surface, Bing, and digital advertising businesses.

Image source: Getty Images.

During the third quarter, Microsoft generated 43% of its revenue from the Intelligent Cloud division, 32% from the Productivity and Business Processes division, and the remaining 25% from the More Personal Computing division. Here's how those three businesses fared over the past year.

Data source: Microsoft. YOY = Year-over-year.

The Intelligent Cloud segment's accelerating growth over the past year was largely driven by Azure, the world's second largest cloud infrastructure platform after Amazon Web Services (AWS). Its "Azure and other cloud services" revenue increased 31% year over year in the third quarter, compared to its 30% growth in the second quarter and 29% growth in the first quarter. Azure has also been growing faster than AWS and Alphabet's Google Cloud Platform (GCP), which ranks third in the cloud infrastructure race, over the past year.

Microsoft attributes a lot of that impressive growth to its investments in OpenAI, the creator of the popular generative AI platform ChatGPT. It's been integrating OpenAI's tools into Azure and its other cloud services to automate, analyze, and accelerate certain tasks, and those upgrades seem to be giving it an edge against AWS and GCP in the cloud race.

Its other businesses are generating stable growth

Microsoft's Productivity and Business Processes segment flourished as its core Office, Dynamics, and LinkedIn platforms all generated double-digit revenue growth during the third quarter. Dynamics 365's revenue notably rose 22% year over year in constant currency terms. By comparison, Dynamics' biggest customer relationship management competitor, Salesforce's Sales Cloud, generated 11% constant currency revenue growth in fiscal 2024 (which ended this January).

The More Personal Computing division, which previously suffered a slowdown in a post-pandemic market as PC shipments declined and the gaming market cooled, also recovered over the past three quarters as its rising sales of Windows licenses, Xbox software and services, and ads offset its declining sales of Xbox consoles and Surface devices. Its acquisition of Activision Blizzard last October also boosted inorganic growth.

Analysts expect Microsoft's revenue to rise 15% in fiscal 2024 and 14% in fiscal 2025. That stable outlook suggests its core businesses will continue to grow even as the broader software market faces unpredictable macro headwinds.

Its margins are still expanding

In the first nine months of fiscal 2024, Microsoft's gross margin expanded 130 basis points year over year to 69.8% as its operating margin rose 390 basis points to 45.2%.

Microsoft attributed its gross margin expansion to the growth of Azure and Office 365's higher-margin services, which offset the higher costs of scaling up its AI infrastructure and integrating Activision Blizzard. Cost-cutting measures, which included 1,900 layoffs across its Xbox and Activision divisions earlier this year, boosted operating margins.

Its free cash flow (FCF) grew 18% year over year to $21 billion during the third quarter, and the company returned $8.4 billion of that cash to its investors through dividends and buybacks. Analysts expect its EPS to grow 19% for the full year and 15% in fiscal 2025. However, Microsoft's stock trades at 30 times forward earnings -- which suggests a lot of its future growth has already been baked into its valuations. Alphabet, which recently posted a strong first quarter, trades at 25 times forward earnings.

It's not too late to buy Microsoft's stock

Microsoft's stock isn't cheap, but investors should continue to pay a premium for its shares as long as its cloud and AI businesses keep growing. With $80 billion in cash, cash equivalents, and short-term investments, the company should also remain a safe haven stock if interest rates stay elevated for the foreseeable future. Simply put, it's not too late to buy Microsoft's stock -- even though it's hovering just a few percentage points below its all-time high.