The company's dominant role in tech will likely fuel its stock for years.
Microsoft's (MSFT 0.84%) stock has soared 466,000% since it went public in 1986. The company has a history of delivering impressive returns thanks to a potent position in tech and consistent reinvestment in its business.
In fact, an early investment in ChatGPT developer OpenAI allowed Microsoft to get a headstart in artificial intelligence (AI), boosting its share price by 89% since the start of 2023. The company rallied investors with AI integration across its various software platforms and impressive earnings growth.
Microsoft has come a long way in its nearly 50 years of business, recently the world's second-most valuable company by market cap (only after Apple). However, Microsoft is only just getting started in key growth markets like artificial intelligence and cloud computing, suggesting plenty of room to run.
So, despite impressive gains over the years, it's not too late to invest long term in Microsoft. Here's why.
Dominating multiple sectors of tech
As the home of brands like Windows, Office, Xbox, Azure, and LinkedIn, Microsoft wears many hats. The company is dominant in multiple industries, from operating systems to productivity software, video games, cloud computing, and even social media. Meanwhile, consistent reinvestment in its business means it has reliably expanded alongside the tech industry, and earnings reflect this.
In the third quarter of 2024 (which ended in March), Microsoft's revenue increased by 17% year over year, outperforming Wall Street estimates by more than $1 billion. The company's productivity and intelligent cloud segments posted sales growth of 12% and 21%, respectively, benefiting from the introduction of new AI services in its Office suite and cloud platform Azure.
AI monetization is clearly paying off. However, a 17% jump in its more personal-computing segment also illustrates the diversification of Microsoft's business. The company attributed much of the growth to its Xbox brand. Microsoft said in its Q3 earnings report, "Xbox content and services revenue increased 62%, driven by 61 points of net impact from the Activision Blizzard acquisition."
Microsoft completed its purchase of Activision last October, granting it ownership of lucrative game franchises like Call of Duty, World of Warcraft, Overwatch, and more. The acquisition quickly boosted Microsoft's revenue, giving it access to a wealth of content that's already earning through in-game purchases and by allowing the company to expand its game-subscription platform, Xbox Game Pass.
In addition to impressive revenue gains, Microsoft's operating income climbed 23% year over year in Q3 after double-digit growth in all three of its primary segments. The company is profiting from growth throughout its business, with earnings only likely to continue rising as its AI, cloud, and gaming divisions develop.
Is Microsoft worth its premium stock price?
Microsoft's stock trades at 34 times its forward earnings, indicating it's not the biggest bargain. Meanwhile, its forward price-to-sales (P/S) ratio is similarly high, at about 12.
These metrics are helpful in determining a stock's value as they consider a company's financial standing. Forward price-to-earnings (P/E) ratio is calculated by dividing a company's share price by its estimated earnings per share. Meanwhile, forward P/S divides share price by estimated sales per share.
For both metrics, the lower the figure, the better the value.
Data by YCharts.
However, the metrics alone don't always tell the whole story. This chart shows Microsoft's forward P/E and P/S are only slightly above their five-year averages, suggesting the company's stock isn't too expensive to consider.
Moreover, Microsoft's total revenue hit $212 billion in fiscal 2023. Yet, revenue estimates for 2024 are at $280 billion and are expected to hit $321 billion the following year. The figures represent a more than 50% increase in sales over two years.
Considering its earnings have only just begun to reflect its investment in AI and recent gaming acquisition, Microsoft likely has much more growth to offer in the coming years. In fact, the AI market on its own was worth just under $200 billion in 2023 and is expanding at a rate that would see it achieve nearly $2 trillion by the end of the decade. Meanwhile, the company is gradually expanding its presence in the sector with generative features on Azure and its Office productivity suite.
Microsoft has long been known for consistent growth and innovation. So, despite considerable gains in recent years, it's not too late to profit from the company's long-term future.
Dani Cook has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
