If you've been waiting for the right time to buy Microsoft (MSFT 0.13%) stock, this could be your chance. A recent pullback in the tech sector has pushed shares off their 2023 highs even as the software giant reported solid earnings results for its latest quarter.
Shares still aren't particularly cheap, though, meaning you'll need to have a multiyear time horizon to maximize your chances at seeing excellent returns from here. But there are some good reasons to like Microsoft stock even at its relatively high valuation.
It's all about the cloud for Microsoft
Big parts of Microsoft's portfolio are under stress at the moment, including its hardware segment and the wider PC business. But overall sales are rising, mainly thanks to its booming cloud services division.
NASDAQ: MSFT
Key Data Points
Cloud-based revenue was $32 billion in the fiscal Q1 selling period that ran through September, the company revealed in late October. That was good enough for a 23% increase year over year. Cloud revenue's strong growth over the last few years has made it a bigger part of the business, accounting for 56% of sales this past quarter. Large customers are looking for partners that can provide a full suite of services ranging from cybersecurity to business productivity, and Microsoft is capitalizing on that demand shift.
Microsoft is seeing profit margins rise
Microsoft is a highly efficient business thanks to several competitive advantages that make it stand out in the tech world. These include its massive global sales base, a valuable brand, and its software-as-a-service (SaaS) selling approach.
MSFT Operating Margin (TTM) data by YCharts
You can see clear evidence of those positive factors at work in the company's profit margin, which recently touched a new high above 40% of sales. Even large, well-established peers like Adobe (ADBE +0.90%) can't match that performance.
The performance gap is even greater when it comes to cash flow. Microsoft is producing close to $100 billion of operating cash flow annually compared to Adobe's $8 billion rate. It's no wonder, then, that the company can commit to a growing dividend payment while still spending aggressively on stock buybacks.
AI is working for Microsoft
There's a lot of hype around anything that touches artificial intelligence (AI), but in Microsoft's case, some concrete benefits reduce the risk that you're overpaying for Wall Street's exuberance. Executives said in a recent conference call that the tech is enabling dramatic improvements in models that form the foundation of many popular productivity services.
Demand for these products is rising due to the improvements, too. It's no wonder, then, that Microsoft is prioritizing aggressive spending on AI integrations. "We will continue to pursue our long-term opportunity and innovation agenda with urgency," CEO Satya Nadella said in a recent call with investors.
The best news is that the stock price doesn't seem to fully reflect all of this good news. You can own shares for about 11 times sales right now, while Adobe, another major player in the AI software space, is priced at 13 times sales. Microsoft's P/E ratio is lower, too, at 33 compared to Adobe's 47.
Sure, both valuations have room to drop if a recession develops in the tech industry. But cyclical downturns don't last long, and Microsoft is highly likely to navigate any slump without losing its prime position in the software industry. Shareholders should focus on that long-term outlook and ignore the volatility that might occur in early 2024.
