Companies as formidable as Microsoft are few and far between.
Sometimes, great investment opportunities are right under your nose. Consider the case of Microsoft (MSFT -0.71%) over the last five years.
A simple $10,000 investment made five years ago would have grown to more than $32,600 today. That's a compound annual growth rate (CAGR) of 26.7% -- far better than the S&P 500's 11.2% CAGR over the same period.
MSFT Total Return Level data by YCharts
So, is the opportunity still there? Should investors buy Microsoft today? Let's dig into the numbers to find out.
Microsoft's stock is bolstered by several growth drivers
Let's begin with Microsoft's immense revenue. In its most recent quarter (the three months ending on June 30, 2023), Microsoft reported $56.2 billion in revenue spread across three segments: Intelligent Cloud, More Personal Computing, and Productivity and Business Processes.
Needless to say, Microsoft's business segment names can be a tad confusing. So, here's a breakdown of each:
- Intelligent Cloud: Azure, GitHub, SQL Server, Windows Server, and other enterprise services
- Productivity and Business Processes: Office software, LinkedIn, and Dynamics (Enterprise applications)
- More Personal Computing: Windows software, Microsoft devices/hardware, gaming, and search advertising
Image source: The Motley Fool.
In short, the first two segments (Cloud and Productivity) are driving Microsoft's revenue higher. Specifically, Azure and other cloud service offerings are growing at or above 20% year over year. Meanwhile, the company's iconic Windows and Office units are growing in the low single digits as the personal computing market continues to struggle two years after the work-from-home boom.
Nevertheless, Microsoft has an ambitious plan to double its revenue by 2030. By growing its cloud services, gaming, and advertising revenue organically or through strategic acquisitions -- like the Activision Blizzard deal-- Microsoft seems well on its way to achieving $500 billion in annual revenue in 2030.
What's more, Microsoft's long-standing partnership deal with ChatGPT-maker OpenAI puts the company in a fantastic position to capitalize on the best AI innovations in the next few years -- perhaps putting immense but unforeseen revenue streams within reach before 2030.
Microsoft's ongoing litigation and high valuation raise concerns
But it's not all blue skies for Microsoft. For one thing, the company's size makes it an obvious target for antitrust regulators. Microsoft boasts a market cap of $2.5 trillion, making it the second-largest American company, and one that straddles increasingly sensitive industries such as AI, social media, and cloud computing. The Federal Trade Commission has sued Microsoft to halt its acquisition of Activision Blizzard, while several authors have sued its partner, OpenAI, alleging copyright infringement.
And while none of those suits are an existential threat to the tech giant's long-term prospects, its valuation might give investors more pause. Shares trade at a price-to-earnings multiple of 34. That's slightly above its five-year average of 32, but significantly above the S&P 500's long-term average of about 16.
Is Microsoft's stock a buy now?
Despite concerns over lawsuits and valuation, Microsoft remains a tech juggernaut. Indeed, its lofty valuation is a sign of quality. Its management is world-class, its products are legendary, and its revenue streams are diverse and growing.
In short, Microsoft remains a great company, and growth-oriented investors should still consider it going forward.
Jake Lerch has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Activision Blizzard and Microsoft. The Motley Fool has a disclosure policy.
