The Best Stocks to Buy in the Dow Right Now

As we approach the end of the year, the Dow Jones Industrial Average is trailing the other two major market indexes, with returns of about 9% year-to-date (YTD). That’s well below the S&P 500 and Nasdaq, which are up about 20% and 36%, respectively, this year.

One of the best performers on the Dow this year has been the technology giant. microsoft (NASDAQ:MSFT), which is up about 55% YTD. Heading into 2024, this remains the best stock to buy in the Dow.

Riding the AI ​​wave

Artificial intelligence has been one of the biggest drivers of the market in 2023, and Microsoft is firmly positioned at the forefront of this rapidly developing and burgeoning market. Microsoft has gone all in on “Copilots,” the new name for its AI-powered Bing Chat. More broadly speaking, the term refers to AI capabilities offered as companions to products such as Windows, Microsoft 365, and others.

“With Copilot, we are making the era of AI a reality for everyone and every business,” said Chairman and CEO Satya Nadella in Microsoft’s fiscal first quarter earnings report. “We are driving increased productivity for our customers by rapidly infusing AI into every layer of the technology stack and every role and business process.”

Microsoft is applying AI across its product lines, but perhaps its most intensive use of the technology is its intelligent cloud business, which includes the Azure cloud computing platform. The segment is growing rapidly, with sales reaching $24 billion in the most recent quarter, up 19% year-over-year. Within the cloud computing segment, the Azure business alone saw a 29% increase in revenue.

Overall, the intelligent cloud business accounted for about 43% of Microsoft’s $56.5 billion in revenue. Not to mention the $13 billion investment in ChatGPT developer OpenAI. Microsoft briefly hired ousted OpenAI CEO Sam Altman, but OpenAI rehired him. However, Microsoft’s stake in the company remains intact and it holds a non-voting seat on OpenAI’s board of directors. ChatGPT is also hosted on the Azure platform through a partnership between OpenAI and Microsoft.

AI has also helped Microsoft increase its market share in the world of cloud computing, up to 23% from 21% a year ago. Although it still lags behind Amazon (NASDAQ: AMZN), it is eating into Amazon’s 32% share due to the strength of its AI capabilities.

Microsoft has been resilient.

While the focus on AI has transformed the company, it still has a variety of revenue streams that allow it to weather market volatility better than most of its competitors. Microsoft’s only negative year since 2011 was 2022, when its stock price fell 28%, but that was still better than many of its technology rivals. In fact, its performance even surpassed that of Nasdaq. As of December 11, Microsoft has recorded an average annual return of 25.7% over the past 10 years.

The company recently finalized its acquisition of game developer Activision Blizzard, which will strengthen the gaming side of its business. However, in its fiscal second quarter outlook, Microsoft expects revenue to grow 17% to 18% from its intelligent cloud business, led by Azure, which is expected to increase revenue by 26% to 27% year-over-year.

Microsoft is well-positioned to grow with AI, but it also has a variety of commercial and consumer products that could perform well in a volatile market over the years. It’s also very reasonably valued, trading at around 35 times earnings. This valuation is up from a year ago, when Microsoft was trading at about 24 times earnings, but its forward price-to-earnings (P/E) ratio is slightly lower at 33.

Analysts rate Microsoft a consensus Buy, with a median price target of $414, which would suggest an upside of about 11% from current prices. Although those prices are below average, 2024 could be a quieter year for stocks, especially technology stocks, after the big run-up in 2023. But Microsoft has been resilient over the years, which could make it the best stock in the Dow next year and beyond.

disclaimer: All investments involve risk. Under no circumstances should this article be taken as investment advice or constitute liability for investment profits or losses. The information in this report should not be relied upon for investment decisions. All investors should conduct their own due diligence and consult their own investment advisors when making trading decisions.