Is It Too Late to Buy Microsoft Stock?

Microsoft (MSFT 1.05%) has had a stellar year so far in 2023, benefiting from tailwinds from a broader rally in tech stocks. Shares of the tech titan are up 15% so far this year, more than triple the gains of the S&P 500. This is in stark contrast to its performance in 2022, when the stock plummeted more than 28%.

This year’s rally followed the company’s stronger-than-expected financial results, which were released on Jan. 24. Microsoft’s resilience in the face of macroeconomic headwinds boosted investor confidence that the company can capitalize on some tremendous and growing opportunities in the coming year.

What does this mean for investors who have sat out Microsoft’s recent rally? Should they buy the stock for additional earnings, or avoid the stock because of its higher valuation and the ongoing meltdown in the personal computer (PC) market? Let’s take a closer look.

Image source: Getty Images.

What has weighed on Microsoft stock?

Microsoft’s strength lies in the diversity of its business, but a large portion still comes from the PC market — which is in a secular decline and has been hit hard by the downturn. In the second quarter of fiscal 2023 (ended Dec. 31), Microsoft’s personal computing segment — which historically accounted for nearly a third of its revenue — declined 19% year over year to $14.2 billion and marked the second consecutive quarter of annual declines.

The good news is that the PC market may have bottomed out. Morgan Stanley analyst Erik Woodring cut his 2023 PC estimates again, but believes the worst is over and the market is already bottoming in the current quarter.

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What Could Drive Microsoft Stock Up?

Aside from a rebound in the PC market, Microsoft has other drivers that could fuel a stock rally.

Among them is above all the cloud infrastructure service Azure. According to data from Synergy Research Group, Microsoft saw strong market share gains in the global cloud infrastructure market in 2022, reaching 23%, up from 21% in the previous four quarters. In fact, Microsoft has had the largest market share gains in the industry over the past five years, growing nearly 11 percentage points since 2017. Given the company’s consistency in market share gains over the past few years, there’s every reason to believe this trend is set to continue.

There’s also the matter of ChatGPT and the growing use of artificial intelligence (AI). Microsoft has invested at least $10 billion in ChatGPT creator OpenAI and is already working to integrate ChatGPT’s capabilities into its Bing search engine. The intent is clear — Alphabet’s Google, which controls more than 90% of the market, to wrest search market share — so even small gains in market share could be big business. Microsoft estimates that every 1% market share it gains represents a $2 billion revenue opportunity.

While it’s too early to tell how successful these efforts will be, the excitement surrounding ChatGPT is palpable. This suggests that Zeal could help attract additional search users to Bing.

This is how you approach Microsoft stock now

Microsoft is currently selling at 31x trailing earnings and 10x trailing sales. While value investors might dismiss the company’s valuation, I’d argue that’s a pretty reasonable price for a company that’s projected to grow both its revenue and earnings per share by double digits by 2024.

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As I described above, Microsoft has a number of catalysts that could propel the stock significantly higher in the months and years to come. Savvy investors with a stomach for a little volatility should consider buying now, especially given Microsoft’s resilience and robust long-term prospects in the high-growth areas of cloud computing and AI.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Danny Vena has held positions at Alphabet and Microsoft. The Motley Fool has positions in and recommends Alphabet and Microsoft. The Motley Fool has a disclosure policy.