Microsoft’s journey in the stock market has not been a thrilling rollercoaster ride akin to its counterparts like Nvidia or Tesla. Despite being at the vanguard of the artificial intelligence (AI) realm with pioneering investments in OpenAI’s ChatGPT, integrated into its esteemed Office suite, Microsoft’s stock growth in 2024 has been modest.
The year-to-date uptick of 14.1% for Microsoft pales in comparison to the S&P 500 Index and the Nasdaq Composite, both boasting returns of approximately 20% during the same period in 2024.
The recent move by Microsoft’s board to enhance quarterly dividend payouts by 10% and initiate a $60 billion share buyback program has attracted attention. Questions linger about Microsoft’s growth narrative amidst industry peers doubling down on AI investments and even facing the ire of analysts, with D.A. Davidson downgrading the stock.
The Robust Fundamentals
Microsoft’s industry standing is undeniable, marked by a colossal $3.2 trillion market cap, trailing only behind Apple globally. Over the past decade, Microsoft’s revenues and earnings have surged at impressive CAGRs of 10.94% and 14.85% respectively, propelling phenomenal wealth creation for its investors.
Consistent quarterly performance underscores Microsoft’s solidity, having missed Wall Street’s earnings expectations only once over the past 16 quarters.
In Microsoft’s recently reported fiscal Q4 2024, revenue soared to $64.7 billion, up 15.2% year-over-year, driven primarily by a 31% surge in Service and other revenues. Notably, EPS climbed to $2.95, signifying the eighth consecutive quarterly earnings beat by the tech giant.
Cash flow surged to $37.2 billion in Q4, closing with a cash reserve of $18.3 billion. Microsoft’s strategic investments in AI, particularly in OpenAI’s ChatGPT, along with substantial capex spending in Q4, bolster its AI capabilities for the future.
The AI Advantages and Beyond
Microsoft’s dominance in the OS realm with Windows commanding a 72% market share positions it favorably to capitalize on the imminent surge in AI PCs. Features like Copilot+ PCs and Copilot Pages accentuate Microsoft’s commitment to fostering intelligent, collaborative ecosystems in the AI landscape.
A strategic AI partnership with BlackRock underscores Microsoft’s intent to empower data warehouses supporting the AI expansion. Despite facing stiff competition in cloud services from industry giants, Azure remains a sought-after choice for Fortune 500 companies, with a targeted revenue of $200 billion by 2028.
Analysts’ Resilient Confidence
While the recent downgrade stirred speculation, a resounding majority of analysts maintain a “Strong Buy” stance on Microsoft. Mizuho’s Gregg Moskowitz reaffirming an “Outperform” rating with a target price of $480 aligns with the optimistic outlook on Microsoft’s revenue growth potential.
Out of 38 analysts scrutinizing the stock, 33 advocate a “Strong Buy,” bolstered by a mean target price of $502.94, indicating a 17.2% upside from current levels.
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