Microsoft (NASDAQ: MSFT) has solidified its position among the “Magnificent Seven,” a term coined by Bank of America’s Michael Hartnett to represent seven behemoth tech companies. While peers like Nvidia, Meta Platforms, and Amazon have outperformed Microsoft thus far in the year, the tech giant is proving to be a promising investment moving forward.

On March 14, Microsoft achieved a new all-time intraday high of $427.82 and a record closing high of $425.22 before experiencing a slight pullback following Adobe’s disappointing guidance, which sent shockwaves through the industry.

As the world’s most valuable company, Microsoft’s market capitalization exceeding $3 trillion is a force to be reckoned with, comprising a massive 7.3% share of the S&P 500 index, surpassing the combined value of the materials, real estate, and utilities sectors!

Here’s a detailed look at why Microsoft, a pivotal player in the Magnificent Seven, could be poised for further growth.

Image source: Getty Images.

Hidden Gems in Plain View

Human nature gravitates towards bargains, whether it’s seizing discounts, leveraging promotions, or snagging low-interest rates. Stock market sell-offs offer plentiful opportunities, yet many investors miss out during bullish markets due to reservations about purchasing shares at higher prices than before. The finest investment prospects, however, often remain undiscovered in plain sight. Microsoft epitomizes this phenomenon.

Emerging as the largest U.S.-based company by market cap in the late 1990s, Microsoft’s journey witnessed milestones, setbacks, and triumphs. Despite playing second fiddle to market darlings like Facebook (now Meta Platforms), Amazon, Netflix, and Google (part of Alphabet), Microsoft’s steady growth trajectory, particularly in cloud infrastructure, underpinned its resilience and future potential.

While the stock market hailed Microsoft’s rebound from the dot-com bubble fallout in 2017, its value has since skyrocketed by over five times from that peak and surged nearly 250% in the past five years alone. Microsoft weathered phases of tepid growth but upheld a sturdy foundation for compounded success over time.

Even today, Microsoft’s recent all-time high symbolizes a well-deserved surge for a premier growth stock.

Promptly Harnessing AI for Profit

On March 13, Microsoft unveiled Copilot for Security, slated for a global rollout on April 1, 2024. In its Q2 fiscal 2024 earnings call, Microsoft divulged an impressive customer base exceeding 1 million for Copilot for Security.

This cybersecurity innovation leverages AI to thwart unauthorized breaches, with a pronounced focus on safeguarding cloud infrastructure, enriching Microsoft Azure, and stimulating growth within its Intelligent Cloud segment. Demonstrating significant efficacy, security professionals utilizing Copilot for Security exhibited a 22% increase in speed and 7% enhancement in accuracy according to Microsoft.

Joining an expanding suite of Copilot solutions, including GitHub Copilot for developers, Copilot for Microsoft 365, DAX Copilot in healthcare, and AI offerings like Azure AI and LinkedIn’s AI features, Microsoft has adeptly capitalized on AI deployment across diverse sales channels, fuelling accelerated business expansion.

A Steadfast Pillar: Ensuring Financial Fortitude

Microsoft’s astounding growth trajectory epitomizes the stock’s meteoric rise. Beyond its dynamic growth narrative, the capital return program and robust balance sheet form intrinsic pillars of its investment thesis.

Outstripping all U.S.-based counterparts in dividend payouts, Microsoft boosted its dividend by over a third in the last three years while curbing its overall share count despite a soaring stock-based compensation outlay surpassing $10 billion in the trailing 12 months.

MSFT Shares Outstanding data by YCharts

While utilizing stock-based compensation to attract premier talent, Microsoft’s strategy has yielded dividends through amplified profits, adeptly offsetting expenses through buybacks—a strategy distinct from firms diluting shareholder value via unfettered stock issuance.

On the financial front, Microsoft’s yearend balance sheet reflected $17.3 billion in cash and equivalents, $63.7 billion in short-term investments (primarily government securities and bonds), $27 billion in short-term debt, and $44.9 billion in long-term debt.

Despite marked escalations in operating expenses and capital outlays in recent years, alongside robust buyback and dividend growth initiatives, Microsoft maintains a balance sheet boasting more cash, equivalents, and short-term investments than its combined debt—signifying a sound financial position.

Distinguishing Company Performance from Market Hype

Superficial observations might hint at Microsoft’s overvaluation, fueling apprehensions of an impending downturn. Ascending to an all-time high amidst years of remarkable growth, the stock appears ripe for profit-taking. With a price-to-earnings (P/E) ratio surging to 37.7—exceeding its five-year median of 32.1 and a ten-year median below 30—coupled with a resurgent market rally in 2024 following 2023’s explosive surge, Microsoft’s valuation may appear stretched.

Yet within this market dynamism, Microsoft demonstrably continues to thrive, propelled by a judicious growth strategy, fortified financial position, and unwavering commitment to technological innovation, underscoring its resilience and fortitude amidst market volatilities.