Microsoft (MSFT 0.43%) recently provided investors with a flood of fresh data about its sprawling tech business. The software giant's fiscal fourth-quarter earnings report included updated demand metrics across its key product lines, along with new projections for fiscal 2024.
Management sounded a positive tone about Microsoft's prospects over the long arc of the new era of AI-powered software and services. But bears will see reasons to be cautious about this expensive stock, too. Let's take a closer look at the main arguments for and against Microsoft stock.
The bearish outlook
Microsoft's sales gains weren't impressive in the aggregate. Revenue rose just 8% through late June, making it hard to call this a high-growth business. Sure, Microsoft posted excellent gains in areas like cloud services, cybersecurity, and its server products. But sluggish results across its PC segment weighed down the broader business.
NASDAQ: MSFT
Key Data Points
Investors can find much faster sales growth trends for this stock's high valuation. Microsoft is priced at 12 times annual sales, or about the same valuation as cybersecurity specialist Palo Alto Networks. The software-as-a-service company last posted a blazing 24% sales increase, or about triple Microsoft's rate.
Meanwhile, video game developer Take-Two Interactive is also much cheaper on a price-to-sales basis and is targeting huge growth in the fiscal year 2025. Bears will argue that these tech stocks represent a better deal than Microsoft does right now.
The bullish outlook
Bulls see many more positive factors supporting this stock. Microsoft has a prime position in several massive growth niches, including the transition to the cloud, enterprise services, video game content, cybersecurity, artificial intelligence (AI), and more.
A few of these segments are already contributing to sales and profits, but game-changing gains are likely ahead. "We continue to innovate across the tech stack to help our customers thrive in the new era of AI," CEO Satya Nadella said in a recent conference call with investors.
And you'll be hard-pressed to find a more financially impressive business. Microsoft last quarter generated $39 billion of gross profit, up from $35 billion a year ago. Operating income jumped to $24 billion from $21 billion, translating into an incredible 43% of sales. By comparison, Apple's operating margin is closer to 30% of sales. And Amazon's is even lower at around 3%.
Owning Microsoft gets you exposure to many of the tech trends that will define the next decade, in other words, along with unusually strong sales and cash flow to boot.
The price of Microsoft stock is high
Growth stock investors might still consider the valuation a bit high, given Microsoft's sluggish demand trends. The business is likely to remain under pressure in areas like consumer tech, digital advertising, and PC sales, after all. Waiting might pay off for patient investors hoping to own Microsoft stock at a more compelling price.
But buying Microsoft stock today is still likely to be a net positive for your portfolio. The bearish argument ignores Microsoft's excellent finances and growing market share -- two factors that will likely drive market-beating returns for patient investors from here.
