Microsoft (NASDAQ: MSFT) has had a good past few years. Its valuation (by market capitalization) has almost tripled in the last three years, and it now sits in the $3 trillion club, with Apple being the only other member at the moment.
Microsoft's stock run has been impressive, but has recently hit a slump. As of Sept. 5, it's down over 12% since hitting an all-time high on July 5. It's also underperforming the S&P 500 this year, which most people likely wouldn't have guessed, given its strong start.
It's always best to zoom out and think big picture when analyzing a stock's performance, but it's hard to ignore Microsoft's recent declines since July. Some may wonder if Microsoft is a buy or if they should hold off until a more "ideal" time. Let's take a look.
Profitability is continuing its momentum
Microsoft consistently puts up good financial numbers, and its latest quarter was no different. Its revenue and operating income both increased 15% year over year, which is impressive for a company of its size. Its earnings per share (EPS) came in at $2.95, beating analysts' estimates. It's also more than double from just five years ago.
MSFT EPS Diluted (Quarterly) data by YCharts
Microsoft's EPS growth is a testament to its ability to increase profitability while growing at the consistent pace it has. Its outstanding shares have only decreased by around 3% over the past five years, so much of the growth can be attributed to its earnings improvement.
You gotta pay to play
The one downside of Microsoft's latest earnings came from its cloud platform , Azure. Microsoft doesn't release revenue numbers for just the Azure platform, but "Azure and other cloud services" revenue increased 29% year over year. This is a slowdown from previous quarters, but not a reason to ring the alarm, in my opinion.
Given how much attention artificial intelligence (AI) has been getting and how it's supposed to boost cloud platforms like Azure, it makes sense that investors put a microscope on that part of Microsoft's business. However, it's a bit early to determine AI's full impact.
Microsoft plans to increase capital expenditures , with the overwhelming majority going to its cloud business and building out its AI infrastructure. It spent $55.7 billion in its fiscal 2024, including $19 billion in the fourth quarter. Investors usually don't like to hear that a company plans to increase spending, but it's a means to an end, especially if Microsoft wants to continue competing with Amazon Web Services (AWS).
MSFT Capital Expenditures (Annual) data by YCharts
AWS is the leading cloud platform, with a 31% market share, but Azure has been picking up steam. Its market share is 25%, well ahead of third-place Alphabet 's Google Cloud, at 11%. AI might not have the immediate effect on Azure's business that was anticipated, but it's still well-positioned to be a high-growth area for Microsoft in the near term.
Growth with a side of guaranteed income
Microsoft may not strike you as a dividend stock, but it has the highest dividend yield of the five "Magnificent Seven" companies that pay one (Amazon and Tesla are the two without one).
At $0.75 quarterly, with a forward dividend yield of just over 0.7%, it's not wowing. However, Microsoft has increased its dividend regularly in recent years, and it's all but certain that it'll continue that streak. In September 2023, it increased its dividend by 10%, so it'll be interesting to see if it ups it by the same percentage this go around.
Even Microsoft's modest dividend has helped boost its total returns. In the past decade, Microsoft's total returns have outpaced its stock price appreciation by over 150%.
MSFT data by YCharts
Microsoft's dividend won't carry the stock, but it is good to have that extra income stream to complement its strong growth.
Premium pricing for a premium company
Some stocks fly under the radar and remain undervalued. Unfortunately, for investors looking for an undervalued gem, Microsoft doesn't fit that definition. With a forward price-to-earnings (P/E) ratio of 31, Microsoft is expensive by most standards. That's no real surprise, though; premium companies often command premium prices.
As an investor, it's your job to determine if the premium price is worth paying. I believe it is in Microsoft's case. Its core businesses are rock solid, and the continued adoption of the cloud presents new growth opportunities. Long-term investors shouldn't give too much weight to Microsoft's current valuation.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Stefon Walters has positions in Microsoft. The Motley Fool has positions in and recommends Alphabet, Amazon, Microsoft, and Tesla. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy .
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