Is Microsoft Stock Buy Now?

Investors have high expectations for what’s around them. microsoft‘S (MSFT 1.13%) Upcoming earnings reports. In late January, the software company will announce strong growth in its core cloud services segment, explaining the impact of artificial intelligence (AI) across its business.

But investors may have already taken this good news with the stock currently valued at close to $3 trillion. Does Microsoft have more room to grow at its lofty position? Let’s take a closer look.

Choose a winner

Microsoft’s exposure to several huge growth paths is a key reason I like this stock. good night AmazonThe company holds an enviable market share in enterprise cloud services through its Azure platform.

But you also get access to the cybersecurity business, the huge personal computing software sector, and owning Microsoft stock also gives you exposure to the attractive video gaming niche.

This entire package generated $57 billion in revenue last quarter, up 12% from a year ago. The double-digit surge came despite sluggish performance in some of the company’s key segments.

CEO Satya Nadella and his team highlighted the performance of its cloud services segment in a January 23 report. Most Wall Street experts expect revenue growth to accelerate to about 17% in the fiscal second quarter, bringing revenue for the quarter to $61 billion. .

benefit from change

At this point, most of the expected returns from the AI ​​boom are theoretical, but investors can already see the technology’s positive impact on Microsoft’s financial results. For example, demand for Azure AI services is growing.

“As customers choose their cloud providers and invest in new workloads, we are well-positioned as a leader in AI to capture those opportunities,” Nadella said during a recent investor call.

For the stock to continue to rise, Microsoft will need to show how these gains will translate into faster revenue growth and increased profitability in 2024. So far the news on this front has been positive. Gross profit margin is close to 70% of sales, the highest in 10 years, and operating profit margin is well over 40% of sales.

Compare that last figure to Amazon’s 4% ratio and you can see why investors are so excited about Microsoft’s long-term profit potential.

Wall Street expects fiscal second-quarter earnings to rise 19% to $2.78 per share. However, Microsoft has exceeded expectations in each of the last four quarters, including a 13% outperformance in the most recent period.

Where do stocks go from here?

There’s likely to be some volatility in Microsoft stock around the earnings report, but investors should tune out the noise and instead focus on the bigger picture. For this business, this means growth in the company’s services segment, with operating margins continuing to rise towards 45% of revenue.

Investors must balance the good news with Microsoft’s high valuation. You should pay 13 times sales for this stock, but you should pay 8 times sales for this stock. apologize We tripled our sales on Amazon. This premium is likely to decline in 2024, especially if the AI ​​boom fails to live up to investors’ high expectations.

However, Microsoft’s many growth opportunities and strong financials mean it should generate steadily growing earnings and should fit into most growth stock portfolios.