What’s Happening With MSFT Stock?

With a 15% rise year-to-date (YTD), Microsoft stock (NASDAQ:MSFT) has fared much better than the broader S&P 500 index, which has gained just 2%. This outperformance is partly attributed to rising demand for Azure amid the AI boom. Microsoft’s substantial AI investments, especially its partnership with OpenAI, have made Azure a highly appealing cloud platform for businesses looking to integrate AI into their operations.

Even if we look at a slightly longer timeframe, MSFT stock has doubled since early 2023, supported by three major factors:

• a 48% increase in the Price-to-Sales (P/S) ratio: The P/S multiple rose from 9x in 2022 to 13.3x now.
• a 36% jump in revenues: Revenues grew from $198 billion to $270 billion over this period.
• a 1% reduction in total shares outstanding: This was due to approximately $86 billion in share buybacks since 2022.

We’ll examine these drivers in more detail. While MSFT stock has delivered strong returns, those seeking growth with less volatility than individual stocks might explore the High Quality portfolio, which has outpaced the S&P 500 with returns exceeding 91% since inception. Also, see Archer Aviation: What’s Happening With ACHR Stock?

What’s Behind The Revenue Growth?

Microsoft has demonstrated solid fundamental performance with a 32% rise in revenue, growing from $198 billion in 2022 to $270 billion in the trailing twelve months. This growth is fueled by several enduring factors:

1. Cloud Services: Azure and Microsoft 365 continue to be powerful growth engines as businesses accelerate digital transformation initiatives.
2. Artificial Intelligence: Microsoft has strategically integrated AI across its product portfolio, with its AI business already exceeding $13B in annual revenue.
3. Gaming Expansion: The Activision Blizzard acquisition has significantly strengthened Microsoft’s gaming division, substantially boosting Xbox content and services revenue.

What’s Driving The Valuation Higher For MSFT Stock?

Microsoft’s stock has experienced a significant increase in valuation multiples, with its price-to-sales (P/S) ratio jumping 48% from 9x in 2022 to 13.3x currently. Several key factors are driving this sustained growth:

1. AI Leadership Premium: A primary catalyst is Microsoft’s strong position at the forefront of the AI revolution. Its strategic partnership with OpenAI and the widespread integration of AI across its product offerings have positioned it as a leader in the space.
2. Dominant Cloud Market Position: Azure’s consistent double-digit growth rates and Microsoft’s strong foothold in the expanding cloud market have further justified these higher valuation multiples.
3. Resilient Recurring Revenue Model: Microsoft’s successful shift to a subscription-based model (e.g., Office 365, Azure) has created more predictable and higher-quality revenue streams.
4. Margin Expansion: Since 2022, Microsoft’s operating margin has expanded by over 300 basis points. Investors anticipate significant operating leverage and further margin expansion as the company scales its cloud and AI services. This expectation of future profitability justifies paying higher multiples on current sales.

But What Next? Is MSFT Stock A Buy At $480?

Currently trading around $480, MSFT stock’s P/S multiple of 13.3x is slightly higher than its four-year average of 12.4x. Refer to Microsoft’s Valuation Ratios for additional context.

We believe that Microsoft’s valuation is poised for further growth driven by strategic AI initiatives. Azure will benefit from rising enterprise AI adoption, increasing demand for cloud infrastructure, and AI platform services. Additionally, AI integration across Microsoft 365 will boost productivity, enhance user workflows and collaboration, leading to higher subscription retention and premium tier adoption. These AI features are also expected to strengthen Teams engagement, drive enterprise software licensing growth, and accelerate the shift to higher-value cloud services as businesses increasingly rely on Microsoft’s comprehensive AI-powered ecosystem.

But There Are Risks

Despite the strong outlook, there are notable risks. In the inflation-led 2022 downturn, MSFT stock dropped 38%, declining from a high of $343 in November 2021 to $214 in November 2022. In contrast, the S&P 500 saw a smaller decline of 25%. Although MSFT rebounded to its pre-crisis peak by June 2023, a similar sell-off occurred earlier this year amid trade war concerns, where MSFT fell nearly 20%, aligning with a 19% drawdown for the S&P 500. More on this is available in our Buy or Sell Microsoft Stock dashboard.

Apart from macro and geopolitical risks, Microsoft faces internal challenges, especially regarding its significant capital expenditures. Since 2022, the company’s capital expenditures bill has crossed $144 billion. A pressing question remains: What if these large-scale investments don’t yield the expected returns?

Now, we apply a risk assessment framework while constructing the 30-stock Trefis High Quality (HQ) Portfolio, which has a track record of comfortably outperforming the S&P 500 over the last 4-year period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.