Microsoft (NASDAQ:MSFT) has been among the biggest believers in the robust growth potential of AI. Among the first mega-cap tech stocks to fully embrace this trend, one could argue that Microsoft’s major investment in OpenAI (and the subsequent release of ChatGPT) led to this market madness to begin with. Since that launch, MSFT stock has been on a tear to new all-time highs, and seems poised to move ever higher.
Of course, trees don’t grow to the sky, and bears are right to point out valuation concerns. Trading at a forward price-earnings ratio of more than 30-times, and a price-sales ratio of around 13-times, MSFT stock isn’t cheap. In fact, it’s among the so-called “Magnificent 7” stocks with among the most magnificent multiples out there.
But there are reasons for this. Here are three of the most pertinent reasons I think investors should be focused on.
Microsoft’s Diversification Is Second-to-None
As mentioned, one could argue that Microsoft brought about real and meaningful investor interest in what generative AI can offer. The company’s ownership of OpenAI and its AI product integrations (such as Co-Pilot) could drive outsized growth relative to its peers for a long time to come.
Analysts now foresee 14% revenue growth by fiscal 2025, topping $257 billion, with the company’s Azure cloud platform eventually rivaling Amazon’s (NASDAQ:AMZN) AWS. Microsoft’s CEO Satya Nadella also received some praise on how he has been leading the company, which has made it more challenging for other companies, like Google, to surpass.
Additionally, Microsoft’s recent strategic move to acquire Activation Blizzard is worth noting. The move has made the tech giant the third-largest gaming company worldwide. It also boosted Microsoft’s influence among other things, including cloud gaming, AI, console, mobile, and PC. This has set a more challenging space for other meta-verse companies and projects.
In addition, Microsoft was also proud to launch its advanced Windows 11 gaming computers, which revolutionizes the gaming technology that we have today. These computers offer disc-less consoles, which is the first in the market.
Investors clearly view MSFT stock as a long-term hold.
Investing Firms Love MSFT
Balentine LLC increased its Microsoft Co. stake by 0.6% in Q3, per their recent Securities & Exchange Commission filing. The firm now has 114,396 shares on hand, equating to about $36,121,000 covering 1.2% of its total holdings.
Aside from Balentine, Allen Investment Management LLC also made some MSFT acquisitions, currently holding over 1,774,314 MSFT shares. Now valued over $560,240,000, the firm’s holdings of MSFT shares took up 8.2% of its total holdings.
Several hedge funds and institutional investors adjusted their Microsoft holdings recently. Adero Partners LLC increased its stake by 2.7% in Q2, now holding 16,815 shares worth $5,726,000. Similarly, Cadian Capital Management LP upped its holdings by 15.1% to 107,000 shares valued at $36,438,000.
C M Bidwell & Associates Ltd. expanded its stake by 5.2% to 5,075 shares worth $1,728,000 in the same period. Geneos Wealth Management Inc. raised its holdings by 4.1% to 82,267 shares valued at $25,976,000 in Q3.
Lastly, HS Management Partners LLC increased its stake by 18.0% to 298,208 shares worth $94,159,000 in the same quarter. These institutional investors and hedge funds hold 69.20% of the company’s stock.
Excellent CAGR and Forward Outlook
When investing in stocks, one must acknowledge the risk of potential losses. However, successful companies can witness substantial valuation expansion, if forward growth rates accelerate. Thus, it should be no surprise that Microsoft Corporation experienced a remarkable 250% share price surge over the past five years.
Despite a recent 2.2% decline, Microsoft achieved 21% compound earnings per share (EPS) growth annually, outpacing the 29% average annual share price increase. Total shareholder return (TSR) accounts for dividends, spin-offs, and discounted capital raisings, providing a more comprehensive view. Microsoft’s TSR of 268% in the last 5 years surpasses its share price return, highlighting the impact of dividends on overall returns.
Microsoft shareholders enjoyed a 65% total shareholder return over the past year, including dividends. With a five-year TSR averaging 30% annually, recent performance suggests improvement—strong share price momentum warrants closer examination of the stock for potential opportunities.
Tracking long-term share price performance adds depth to investment analysis. In this case, Microsoft’s long-term trend remains unmatched.
Bottom Line
There are few better mega-cap tech options investors can consider right now, hands down. Microsoft remains a top buy recommendation of mine, for investors seeking large-cap exposure. Until the company shows signs of faltering growth, I think its valuation is sustainable and reasonable.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
