Fueled by a surge in artificial intelligence (AI)-driven market activity, the tech sector has been driving the market’s upward trajectory throughout 2023. After facing significant headwinds in 2022 due to the Federal Reserve’s aggressive interest rate hikes, the tech-focused Nasdaq 100 Index ($IUXX) has impressively bounced back, boasting a year-to-date gain of over 39.1%. In contrast, the broader S&P 500 Index ($SPX) has seen a more modest increase of 15.9% for the year.
Notably, one standout performer in 2023 has been the long-standing tech giant, Microsoft (NASDAQ:MSFT). Microsoft’s stock has soared by 39.3% this year, outpacing the S&P 500 by a substantial margin and even edging past the Nasdaq 100 as of the latest data.
Despite a recent pullback in the broader Nasdaq market since mid-July, there’s a compelling opportunity for investors to consider buying Microsoft stock now, especially for those looking to establish long-term positions. Whether you’re drawn to the growth potential of AI or the reliability of its dividend yield, here are five convincing reasons why Microsoft deserves a place in your investment portfolio:
Consistent Earnings Surprises
Microsoft has consistently outperformed earnings expectations in recent quarters. Over the past five quarters, the company’s earnings per share (EPS) exceeded analyst estimates on four occasions. Even in the sole instance where earnings fell short of expectations in July 2022, MSFT’s stock rebounded after reporting, thanks to its robust forward guidance. In its most recent quarterly results, Microsoft exceeded EPS estimates by 5.5%, driven by strong revenue growth in crucial segments like cloud (up 15.3% year-over-year) and productivity and business processes (up 10.2% year-over-year).
AI Leadership
While Microsoft’s stock performance post-earnings has been muted due to management’s outlook of slower revenue growth from AI-driven activities in the upcoming quarters, the company remains at the forefront of this rapidly expanding field. Microsoft’s investment in ChatGPT is poised to pay off as its parent company, OpenAI, approaches $1 billion in annual sales. Additionally, Microsoft has integrated ChatGPT into its cloud platform for enterprise clients, benefiting key partners such as PwC, AT&T, and Moody’s. The company is also infusing AI into its “Productivity and Business Processes” segment, which accounts for a significant portion of its revenue. Microsoft’s Copilot, a generative AI-powered tool, is set to be integrated into Microsoft 365, including popular Office apps like Word and Excel. This strategic move, coupled with strong pricing power, is expected to drive additional revenue through app sales on its Microsoft AppSource platform.
Strength in Cloud Computing
Microsoft is a major player in the cloud computing arena, alongside Google and Amazon AWS, collectively dominating about 66% of the global cloud market, which is projected to reach a staggering $2.2 trillion by 2030. With its robust capabilities and substantial market share, Microsoft is well-positioned to benefit from the anticipated growth in the global enterprise cloud market. Beyond cloud services, Microsoft Azure is also poised to gain market share in IT services and communication services segments.
Reliable Dividend Yield
In addition to its impressive stock performance, Microsoft offers investors a dependable dividend yield of 0.82%. This compares favorably to some of its cash-rich competitors like Amazon and Google, neither of which pays regular dividends. Microsoft’s dividend yield is also superior to that of its tech peer Apple, which yields 0.51%. Impressively, Microsoft has consistently increased its dividend for the past nine years.
Positive Analyst Projections
Analysts remain optimistic about Microsoft’s earnings growth potential, forecasting a 12.8% improvement for the current quarter and an 11.1% increase for FY 2024. Overall, analysts maintain a bullish outlook on Microsoft stock, with a consensus “Strong Buy” rating and an average target price of $383.49, implying a potential upside of approximately 15.7% from current levels. The highest target of $440 suggests an expected upside of nearly 33%. Out of 35 analysts covering the stock, 29 rate it as a “Strong Buy,” 3 as a “Moderate Buy,” 2 as a “Hold,” and just 1 as a “Strong Sell.”
Conclusion
Considering all factors, Microsoft appears poised for sustained outperformance. Despite intense competition in AI and cloud computing, Microsoft’s robust financial position, pricing power, and proven execution capabilities position it favorably. Consequently, Microsoft stock presents an attractive investment opportunity, particularly during periods of market weakness.
Featured Image: Unsplash
