The rapid rise of artificial intelligence (AI) has propelled Microsoft (NASDAQ: MSFT) to impressive heights, with its stock up 72% since 2022. However, as its price-to-earnings (P/E) ratio climbs to 34—on the high end of its 10-year range and above the S&P 500’s P/E of 30—investors are left questioning whether the stock still represents a solid investment.
One noteworthy development is the continued sale of Microsoft stock by the Bill & Melinda Gates Foundation. Despite still holding a significant stake, the foundation has sold shares in each of the last four quarters. While the foundation’s history of selling shares is tied to its philanthropic goals, this ongoing trend could suggest lower return expectations for Microsoft’s future growth.
However, the outlook isn’t entirely negative. Microsoft’s revenue growth, particularly in its cloud division, remains strong. Azure cloud services grew by 22% year-over-year in the first quarter, while the gaming division saw significant boosts from the Activision Blizzard acquisition. Overall, Microsoft’s cloud and gaming businesses are performing well, bolstered by its AI investments.
Despite the high P/E ratio, one reason to hold Microsoft stock is the company’s impressive cash flow. With $72 billion in free cash flow over the past year and $9 billion returned to shareholders in the form of dividends and stock buybacks, Microsoft has shown it can generate significant value for investors. Additionally, the company has integrated AI services across its products, contributing to Azure’s 33% revenue growth last quarter.
Still, the company’s bottom line growth faces challenges. While revenue grew by 16% year-over-year, AI investments led to a 7% dip in free cash flow. This could signal short-term pressure on profitability, despite the long-term potential of AI.
Looking at the Gates Foundation’s sales patterns, they seem to align with the stock’s valuation. In late 2022, when Microsoft stock was undervalued, the foundation held onto its shares, indicating confidence in the company’s value. However, as the stock price increases, their sales have intensified, potentially signaling caution regarding the stock’s current value.
Wall Street forecasts that Microsoft’s earnings will grow by nearly 11% in fiscal 2025, but this growth may not be enough to justify its high P/E ratio, especially when compared to other tech giants like Meta Platforms and Alphabet, which are trading at lower valuations and offering better growth prospects.
For current investors, holding onto Microsoft shares may still be wise, especially if selling would trigger unnecessary capital gains taxes. However, for new investors, there are likely more attractive opportunities in the market.
Should you invest $1,000 in Microsoft right now?
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While Microsoft remains a strong company with promising AI ventures, it might not be the best option for investors looking for growth at a reasonable price right now.
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