Tech giant Microsoft (MSFT 0.73%) has been an excellent stock to own over the years. In the past decade, it has risen by around 660%, which translates into a compounded annual growth rate of more than 22% -- that's more than double the S&P 500's long-run average of 10%.
That's what makes the stock's struggles this year all the more noticeable. Since the beginning of the year, Microsoft's stock has fallen by 18%. That's a big sell-off for what's traditionally been a safe tech stock to own. What's behind this decline, and could it be the start of an even bigger crash ahead for Microsoft, or could this be a great time to add it to your portfolio?
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Is artificial intelligence (AI) to blame?
Microsoft is down big this year, even in relation to other tech giants. The Roundhill Magnificent Seven ETF has declined at a more modest rate of 7%. The market as a whole has been bearish on tech stocks of late, with heavy AI spending a big reason for that. But in Microsoft's case, the sell-off goes deeper than that.
It may be a combination of multiple factors that are responsible, including the stock trading at a high valuation, and the company's Copilot AI simply not appearing to be that impressive in relation to other popular chatbots. As a result, Microsoft's stock may have been overdue for a decline.
NASDAQ: MSFT
Key Data Points
Why Microsoft still makes for a solid long-term buy
Entering this year, Microsoft's stock was trading at around 34 times its trailing earnings (it's now around 25), which is a high valuation unless you expected robust AI-related growth. While AI has given it a bit of a boost, its growth rate for the December quarter was 17%, and that falls to 15% when factoring out foreign exchange. It's solid, but not overly impressive or much higher than what it was before.
However, this is still a robust business with many different segments, including gaming, office software, devices, and others, that can help the company grow for years. There are also many opportunities for AI to enhance its existing products and services. On top of all that, Microsoft has incredibly deep pockets, amassing more than $119 billion in profit over the trailing 12 months.
Microsoft's stock was overvalued heading into the year, but now, with a more reasonable valuation, it may be a great time to buy it. This is a solid blue chip stock that you can build your portfolio around.
