Microsoft (NASDAQ: MSFT) has witnessed a meteoric rise in valuation over the past three years. Nearly tripling its market capitalization, the tech giant has ascended to the prestigious $3 trillion realm, joining the ranks of only one other member, Apple.
Despite its impressive stock performance, Microsoft recently hit a rough patch. Since reaching an all-time high on July 5, the stock has plunged by more than 12%. Surprisingly, it now lags behind the S&P 500 for the year, contrary to initial expectations.
While it’s crucial to adopt a broader perspective in evaluating a stock’s trajectory, the recent setbacks in Microsoft’s share price since July are hard to overlook. Many investors ponder whether now is the right time to buy Microsoft or if it’s wise to wait for a more opportune moment. Let’s delve deeper.
The Profitability Momentum Continues
Microsoft has consistently delivered solid financial performance, with the latest quarter being no exception. Posting a 15% year-over-year increase in revenue and operating income, the company’s earnings per share (EPS) stood at $2.95, surpassing analysts’ expectations. This figure has more than doubled over the past five years, showcasing remarkable growth.
Microsoft’s ability to bolster profitability while maintaining steady growth is evident in its meager reduction in outstanding shares, approximately 3% over the past half-decade. The bulk of its growth can be attributed to earnings enhancement.
The Price of Progress
While Microsoft’s latest earnings report indicated robust performance, its cloud platform, Azure, witnessed a slight slowdown in revenue growth. Despite a 29% year-over-year increase in “Azure and other cloud services” revenue, concerns arose over the platform’s pivotal role in the era of artificial intelligence (AI) and cloud computing.
To fortify its position in the cloud market and invest in AI infrastructure, Microsoft plans to ramp up capital expenditures, allocating a substantial portion to its cloud business. While increased spending may deter some investors, it remains a strategic move to compete with industry behemoths like Amazon Web Services (AWS).
Growth Alley with a Side Serving of Guaranteed Returns
Despite not being commonly associated with dividend stocks, Microsoft boasts the highest dividend yield among the “Magnificent Seven” dividend-paying companies, surpassing tech giants like Amazon and Tesla.
With ongoing dividend increments in recent years, investors can expect a continued streak of dividend growth. Microsoft’s moderate dividend yield has significantly contributed to its total returns, outstripping stock price appreciation by more than 150% in the past decade.
Premium Pricing for a Premium Player
Unlike hidden gems that fly under the radar, Microsoft’s premium stature is evident in its hefty price tag. Sporting a forward price-to-earnings (P/E) ratio of 31, the company commands a premium valuation, synonymous with its premium standing in the industry.
Long-term investors should view Microsoft’s current valuation with a tempered perspective, considering the resilience of its core business and the burgeoning opportunities presented by cloud adoption.
Is Microsoft Stock Worth Your $1,000 Investment?
Before diving into Microsoft stock, it’s prudent to weigh the following:
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