What’s Behind The 2x Rise In Microsoft Stock?
With a 15% year-to-date (YTD) gain, Microsoft stock (NASDAQ:MSFT) has significantly outperformed the broader S&P 500 index, which is up just 2%. This strong performance is largely attributed to increased demand for Azure, fueled by the ongoing AI boom. Microsoft’s heavy AI investments—most notably its collaboration with OpenAI—have positioned Azure as a highly attractive cloud platform for businesses aiming to incorporate AI into their operations.
Looking at a broader timeline, MSFT stock has doubled since early 2023, driven by three primary factors:
- A 48% increase in its Price-to-Sales (P/S) ratio, climbing from 9x in 2022 to 13.3x currently.
- A 36% revenue increase, rising from $198 billion to $270 billion.
- A 1% decline in total shares outstanding, supported by approximately $86 billion in share buybacks since 2022.
We’ll dive deeper into these drivers. While MSFT stock has generated impressive returns, investors seeking strong growth with lower volatility might consider the High Quality portfolio, which has outperformed the S&P 500 with returns exceeding 91% since inception. Also, check out Archer Aviation: What’s Happening With ACHR Stock?
Image by efes from Pixabay
What’s Behind The Revenue Growth?
Microsoft has delivered strong fundamentals, with a 32% increase in revenue from $198 billion in 2022 to $270 billion over the trailing twelve months. This growth has been driven by several structural factors:
- Cloud Services: Azure and Microsoft 365 continue to power growth as enterprises accelerate their digital transformations.
- Artificial Intelligence: Microsoft has deeply embedded AI across its product suite, with AI now contributing more than $13 billion annually in revenue.
- Gaming Expansion: The Activision Blizzard acquisition has significantly enhanced Microsoft’s gaming unit, boosting revenue from Xbox content and services.
What’s Driving The Valuation Higher For MSFT Stock?
MSFT’s valuation multiples have expanded significantly, with the P/S ratio increasing 48% from 9x in 2022 to 13.3x. Several key elements explain this valuation uplift:
- AI Leadership Premium: Microsoft’s leadership in the AI space—bolstered by its OpenAI partnership—has reinforced its premium position in the market.
- Strong Cloud Market Presence: Azure’s sustained double-digit growth and Microsoft’s strength in cloud services support the elevated multiple.
- Stable Recurring Revenue: The company’s move to subscription-based models like Office 365 and Azure provides predictable, high-quality revenue streams.
- Margin Expansion: Operating margins have expanded by over 300 basis points since 2022. Investors expect further margin gains and operating leverage as Microsoft scales its AI and cloud offerings, justifying higher valuation levels.
But What Next? Is MSFT Stock A Buy At $480?
Trading near $480, MSFT’s P/S ratio of 13.3x is slightly above its four-year average of 12.4x. See Microsoft’s Valuation Ratios for deeper insights.
We believe Microsoft’s valuation has room to grow further, supported by strategic AI initiatives. Azure stands to gain from increasing enterprise AI adoption and demand for cloud infrastructure and platform services. Meanwhile, embedding AI into Microsoft 365 will enhance productivity, improve collaboration, and drive higher subscription upgrades and retention. These innovations are also expected to boost engagement on Teams, increase software licensing revenue, and accelerate the transition to premium cloud services as businesses adopt Microsoft’s integrated AI ecosystem.
But There Are Risks
Despite the optimistic outlook, risks remain. In the inflation-driven downturn of 2022, MSFT stock dropped 38%, from a peak of $343 in November 2021 to $214 by November 2022—more than the S&P 500’s 25% decline. Although it recovered to pre-crisis levels by June 2023, a subsequent sell-off occurred earlier this year amid trade tensions, where MSFT dropped nearly 20%, mirroring a 19% fall in the S&P 500. For more, refer to our Buy or Sell Microsoft Stock dashboard.
Beyond macroeconomic and geopolitical issues, Microsoft faces internal risks—chiefly its aggressive capital spending. Since 2022, capital expenditures have topped $144 billion. The key concern: what if these large-scale investments fail to produce expected returns?
That’s why we apply a risk-adjusted framework in building the 30-stock Trefis High Quality (HQ) Portfolio, which has consistently outperformed the S&P 500 over the last four years. Why? HQ Portfolio companies offer stronger returns with lower risk relative to the broader market, providing a smoother ride, as shown in HQ Portfolio performance metrics.
Invest with Trefis Market-Beating Portfolios
See all Trefis Price Estimates