Microsoft Corporation (NASDAQ:MSFT) is one of the largest companies globally, thanks to years of strong execution and a business model with wide moats. It leads in secular trends such as AI adoption, cloud computing, and business automation. However, Microsoft stock has recently underperformed against key competitors, presenting a potential buying opportunity.
Microsoft Stock Performance vs. Peers
While Microsoft Corporation (NASDAQ:MSFT) has consistently performed well, it lagged behind competitors like Amazon.com, Inc. (NASDAQ:AMZN), Alphabet Inc. (NASDAQ:GOOGL, GOOG), and Apple Inc. (NASDAQ:AAPL) over the past year. Additionally, it has underperformed against indices such as the Nasdaq-100 (NASDAQ:QQQ) and S&P 500 (NYSEARCA:SPY).
Key Performance Metrics
- 1-Year Performance: Microsoft underperformed against major peers and indices.
- 3-Year Performance: Microsoft outperformed Alphabet Inc. (NASDAQ:GOOGL) but trailed others.
- 5-Year Performance: Microsoft outperformed Amazon.com, Inc. (NASDAQ:AMZN) and the S&P 500 but fell behind Apple Inc. (NASDAQ:AAPL).
Addressing Microsoft’s Underperformance
Although Microsoft stock underperformed in the past year, it has maintained strong financials and steady growth. With a five-year compound annual growth rate (CAGR) of 17.5%, Microsoft has shown consistent earnings growth, with net income increasing from $44 billion in 2020 to approximately $88 billion in 2024.
Valuation Analysis
- Microsoft Forward P/E Ratio: 29.6x (historical mean: 30.9x)
- Apple Forward P/E Ratio: 32.4x (historical mean: 27.5x)
- S&P 500 Forward P/E Ratio: 23x (historical mean: 20.7x)
While Microsoft’s forward P/E is close to its historical mean, it has contracted slightly compared to Apple Inc. (NASDAQ:AAPL) and the S&P 500. This suggests that Microsoft Corporation (NASDAQ:MSFT) remains reasonably valued compared to its long-term potential.
Why Microsoft Corporation (NASDAQ:MSFT) Is a Long-Term Buy
1. Proven Execution
Microsoft has continually adapted to market trends, with Azure evolving into a major growth driver. The company has successfully transitioned from licensing to a recurring revenue model via Microsoft 365 and AI-powered solutions.
2. Resilient Business Model
Microsoft’s diverse revenue streams, including software, cloud computing, gaming, and AI, provide stability. Its recurring revenue structure offers high predictability and resilience against economic downturns.
3. Exposure to Secular Megatrends
Microsoft is a leader in cloud computing, AI, and digital transformation, all of which are expected to grow significantly:
- Cloud Growth Projections: CAGR of 21-22% until 2030 (Goldman Sachs, Grand View Research)
- Business Automation & AI Expansion: Expected to drive future revenue growth
- Quantum Computing Innovations: Potential to enhance Microsoft’s AI and cloud services
4. Strong Financials
- Net Income Margin: Over 35%
- Return on Invested Capital (ROIC): Exceeds 24%
- Low Leverage: Net debt/EBITDA ratio of 0.2x
- Cash Reserves: Over $70 billion in cash and short-term investments
Microsoft Stock Outlook: Expected Returns and Growth
Financial Forecast
By fiscal year 2029, Microsoft’s revenue is projected to grow by 12% annually, with further EPS growth through efficiency improvements, buybacks, and AI-driven automation.
Projected Net Income by FY 2029: $186 billion Estimated P/E Ratio in 2030: 16x to 27x
If Microsoft maintains a 27x P/E ratio, investors could see an upside of 65% over five years, translating to an annual return of ~10%.
Final Thoughts
Microsoft Corporation (NASDAQ:MSFT) remains one of the strongest long-term investments due to its financial stability, exposure to megatrends, and strong execution. While the stock may not be a deep-value play, its potential for ~10% annual returns makes it a compelling buy.