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Compared to some of its peers in the mega-cap tech industry, like Nvidia (NVDA) or Tesla (TSLA), the shares of Bill Gates co-founded Microsoft (MSFT) have had a relatively uneventful 2024 so far. This is despite the fact that the company has been at the forefront of the artificial intelligence (AI) megatrend through its investments in generative AI pioneer OpenAI's ChatGPT, and the integration of the revolutionary tech in its popular suite of Office products.
In fact, Microsoft stock is up 14.1% on a YTD basis, underperforming the roughly 20% returns of the S&P 500 Index ($SPX) and the Nasdaq Composite ($NASX) in 2024.
Last week, the board at Microsoft recently undertook the twin measures of increasing its quarterly dividend by 10% and launching a massive new $60 billion share buyback program.
While skeptics might view these moves as troubling at a time when Microsoft's rivals are pouring their cash into the AI arms race - and D.A. Davidson even downgraded the stock shortly after - should investors be concerned about the growth story at MSFT? Let's have a closer look.
Fundamentals: As Strong As It Gets
Microsoft's market cap currently stands at a staggering $3.2 trillion, placing it just behind Apple (AAPL) in terms of the most valuable companies in the world. Over the last period 10 years, Microsoft's revenues and earnings have compounded at impressive CAGRs of 10.94% and 14.85%, respectively. Consequently, its market cap has expanded by almost 10 times in the intervening period, creating massive wealth for shareholders.
When it comes to its quarterly earnings results, Microsoft is a consistently solid performer, as well. Notably, over the past 16 quarters, Microsoft's earnings per share (EPS) have missed Wall Street's consensus expectations only once.
In the most recently reported fiscal fourth quarter of 2024, both revenue and earnings once again surpassed estimates. MSFT reported revenues of $64.7 billion in Q4, up 15.2% from the previous year. A 31% YoY increase in Service and other revenues drove the overall growth, as revenues from the Product segment dipped 21.6% in the same period.
EPS grew by 10% from the prior year to $2.95, outpacing the consensus estimate. Notably, this marked the eighth consecutive quarterly earnings beat by the company.
Net cash from operations soared to $37.2 billion in the fourth quarter, up from $28.8 billion in the previous year, as MSFT closed the quarter with a cash balance of $18.3 billion.
As for Microsoft's AI capabilities, its multi-billion dollar investment in OpenAI's ChatGPT is well known. Moreover, in Q4, the company spent $19 billion as capex on AI.
Additionally, Azure AI customers grew 60% year over year, with the cloud segment reporting revenues of $28.5 billion (up 18.9% YoY). The company highlighted growth in $10 million and $100 million+ deals for Azure and Microsoft 365, indicating strong customer commitments to long-term AI-led contracts.
Looking ahead, analysts are forecasting forward revenue growth of 14.65% and EPS growth of 16.58% for MSFT, well above the tech sector medians of 6.58% and 6.95%, respectively.
AI and More Tailwinds
Digging deeper into Microsoft's AI capabilities, Windows is the preeminent operating system in the world, with a dominant 72% market share - positioning it well to take advantage of the boom that is expected in AI PCs in the coming years. The company says, “Copilot+ PCs are the fastest, most intelligent Windows PCs ever built. With powerful new silicon capable of an incredible 40+ TOPS (trillion operations per second)”.
Further, Copilot Pages, a new business-oriented AI from the company, allows for multi-payer AI collaboration on the same document. Microsoft said Copilot Pages “will allow users to use the Copilot chatbot and plug its answers into a new page so several users can edit them simultaneously."
Along with its sizeable AI spend in Q4, Microsoft recently launched an AI partnership with the world's largest asset manager, BlackRock (BLK). The partnership will entail “one of the largest efforts to date to bankroll the build-out of data warehouses and energy infrastructure behind the boom in artificial intelligence.”
In terms of its cloud services, it is a fact that Microsoft is facing intense competitive pressure from the likes of Amazon and Alphabet's (GOOGL) Google. However, Microsoft continues to enjoy an strong position for its Azure services among Fortune 500 companies, with an 85% share, and revenues expected to reach $200 billion by 2028.
Analysts Are Still Bullish
Despite the rare downgrade earlier this week, the overwhelming majority of analysts still consider MSFT stock a “Strong Buy.”
Notably, the dividend hike and share buyback announcement elicited a bullish nod from Mizuho, with analyst Gregg Moskowitz reiterating an “Outperform” rating on MSFT with a target price of $480. In a note, the analyst also cited Microsoft's revenue growth opportunities over the medium term and beyond, which he thinks are more substantial than most investors realize.
Out of 38 analysts covering the stock, 33 have a “Strong Buy” rating, 3 have a “Moderate Buy” rating, and 2 have a “Hold” rating.” The mean target price is $502.94, which denotes an upside potential of 17.2% from current levels.
