Tech juggernaut Microsoft (NASDAQ: MSFT) recently concluded its fiscal year 2024 with a bang, revealing its fourth-quarter financial results. Despite being the world’s second-largest company by market cap, generating over $200 billion in annual revenue, Microsoft continues to exhibit impressive growth rates. While the Q4 earnings exceeded expectations in terms of both revenue and profits, the stock experienced a slight dip post-announcement.
Resilient Diversification Leading to Exceptional Performance
Microsoft’s expansive product portfolio plays a ubiquitous role in society, evidenced by a recent IT outage that paralyzed millions of computers globally, impacting various sectors like airlines and banking. With its software dominating personal and enterprise systems, Azure driving the cloud revolution, ownership of popular gaming brands, LinkedIn, and more, Microsoft remains a formidable presence in the tech landscape. Notably, the company exhibited robust growth across multiple sectors. Commercial Office 365 software sales surged by 12% year over year, personal 365 subscriptions increased to 82.5 million, LinkedIn revenue grew by 10%, and Azure cloud services observed a 29% revenue spike due to artificial intelligence (AI) tailwinds. Even the age-old Windows platform witnessed a 7% sales uptick. Overall, Microsoft’s Q4 revenue soared by 15% year over year, reaching $64.7 billion, with earnings per share climbing to $2.95, a 10% increase from the previous year.
Despite a commendable 29% growth in Azure, slightly missing the 30% to 31% forecasted target, management provided crucial context during the Q4 earnings call. The company cited insufficient AI capacity as a limiting factor, with AI contributing significantly to Azure’s growth figures. Microsoft’s Azure AI client base expanded to over 60,000 in Q4, marking a 60% year-over-year increase, while per-customer expenditure continued to rise. The company allocated $19 billion to capital expenditures in Q4, primarily focusing on cloud and AI infrastructure. Forecasts indicate increased spending in 2025 to accommodate the escalating demand for AI capabilities.
Azure AI’s growth could have been even more robust in Q4 if not for capacity constraints, signaling substantial long-term expansion prospects as data center capabilities evolve.
Investment Prospects: To Buy or Not to Buy?
Microsoft’s cloud division stands as its largest and fastest-growing segment, expected to drive overall growth as AI capabilities mature. Analysts predict a 16% average annual earnings growth rate for Microsoft over the next three to five years, aligning with the company’s current revenue trajectory. As capital investments gradually stabilize, earnings are poised to benefit. However, with Microsoft’s price-to-earnings (P/E) ratio standing at 35 times the 2024 earnings, leading to a price/earnings-to-growth (PEG) ratio of 2.2, the stock appears slightly overvalued. Although the market has historically rewarded Microsoft with a solid P/E ratio of 32 over the last five years, caution is advised before acquiring Microsoft shares. Potential investors are urged to exercise patience, awaiting potential market corrections that may present more favorable entry points for high-flying stocks like Microsoft.
Strategic patience could prove rewarding in the case of Microsoft’s investment appeal.
Contemplating a $1,000 Investment in Microsoft
Before delving into Microsoft stock, ponder this insight:
The Motley Fool Stock Advisor analyst team identified 10 top-performing stocks for investors to consider, with Microsoft not making the cut. The selected stocks hold the potential for substantial returns in the near future.
Reflect on the impact of Nvidia making this list in 2005 – a $1,000 investment then would amount to an impressive $657,306 today!
Stock Advisor offers a simplistic guide to success, featuring portfolio building strategies, analyst updates, and two new stock recommendations monthly. Since 2002, the Stock Advisor service has surpassed the S&P 500 returns fourfold.
Explore the 10 recommended stocks »
*Stock Advisor returns as of July 29, 2024