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With a 15% rise year-to-date (YTD), Microsoft stock (NASDAQ:MSFT) has fared much better than the broader S&P 500 index, which has gained just 2%. This outperformance is partly attributed to rising demand for Azure amid the AI boom. Microsoft's substantial AI investments, especially its partnership with OpenAI, have made Azure a highly appealing cloud platform for businesses looking to integrate AI into their operations.
Even if we look at a slightly longer timeframe, MSFT stock has doubled since early 2023, supported by three major factors:
We'll examine these drivers in more detail. While MSFT stock has delivered strong returns, those seeking growth with less volatility than individual stocks might explore the High Quality portfolio, which has outpaced the S&P 500 with returns exceeding 91% since inception.
Microsoft has demonstrated solid fundamental performance with a 32% rise in revenue, growing from $198 billion in 2022 to $270 billion in the trailing twelve months. This growth is fueled by several enduring factors:
Microsoft's stock has experienced a significant increase in valuation multiples, with its price-to-sales (P/S) ratio jumping 48% from 9x in 2022 to 13.3x currently. Several key factors are driving this sustained growth:
Currently trading around $480, MSFT stock's P/S multiple of 13.3x is slightly higher than its four-year average of 12.4x.
We believe that Microsoft's valuation is poised for further growth driven by strategic AI initiatives. Azure will benefit from rising enterprise AI adoption, increasing demand for cloud infrastructure, and AI platform services. Additionally, AI integration across Microsoft 365 will boost productivity, enhance user workflows and collaboration, leading to higher subscription retention and premium tier adoption. These AI features are also expected to strengthen Teams engagement, drive enterprise software licensing growth, and accelerate the shift to higher-value cloud services as businesses increasingly rely on Microsoft's comprehensive AI-powered ecosystem.
Despite the strong outlook, there are notable risks. In the inflation-led 2022 downturn, MSFT stock dropped 38%, declining from a high of $343 in November 2021 to $214 in November 2022. In contrast, the S&P 500 saw a smaller decline of 25%. Although MSFT rebounded to its pre-crisis peak by June 2023, a similar sell-off occurred earlier this year amid trade war concerns, where MSFT fell nearly 20%, aligning with a 19% drawdown for the S&P 500.
Apart from macro and geopolitical risks, Microsoft faces internal challenges, especially regarding its significant capital expenditures. Since 2022, the company's capital expenditures bill has crossed $144 billion. A pressing question remains: What if these large-scale investments don't yield the expected returns?
Now, we apply a risk assessment framework while constructing the 30-stock Trefis High Quality (HQ) Portfolio, which has a track record of comfortably outperforming the S&P 500 over the last 4-year period. As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.