Here are three reasons why Microsoft is the “Magnificent 7” tech stock to have in your portfolio now.
Azure Platform Leads Company Growth
The Azure cloud computing platform has been a key driver of top-line growth for Microsoft for some years now. Cloud technology has already prompted a number of enterprises to migrate their data from on-premise servers to distant ones that power the cloud. The COVID-19 global pandemic sped up the timeline of many of these cloud migrations as businesses were forced to operate remotely.
The rise of generative artificial intelligence has most recently created growth tailwinds for Microsoft’s cloud business. In the software company’s third quarter earnings report for fiscal year 2024, the intelligent cloud business, which includes cloud products like Azure and Windows servers, grew by 21% year-over-year (YOY) to $26.7 billion. Azure, in particular, grew 31% YOY. Driving much of Azure’s growth was the platform’s AI-related capacities.
Investments in AI Continue
Diving deeper into the AI discussion, Microsoft’s investments into the sector seem to be paying off. The company invested billions of dollars into OpenAI, the startup that built ChatGPT. Microsoft also provides cloud services for the AI chatbot. This has drawn many other startups and larger enterprises to leverage Azure’s capabilities in order to create their own AI technologies.
Microsoft’s investments haven’t been limited to the U.S. either. The software giant announced in April it would invest around $2.9 billion into nurturing cloud and AI technologies in Japan. Around the same time, the tech giant announced a similar but smaller $1.7 billion investment in Indonesia. Lastly, in order to bring AI to the U.S. manufacturing sector, Microsoft also announced a $3.3 billion investment package for a co-innovation lab in Wisconsin.
Valuation Doesn’t Look Stretched
Now that Microsoft’s growth tailwinds are clear. What about the software firm’s valuation? MSFT has risen 14.8% for the year since last Friday’s trading session, and the stock currently trades at 34x forward earnings. This valuation is at the higher end of its competitive peer set. Amazon (NASDAQ:AMZN), for example, trades at around 37.9x forward earnings, while Apple (NASDAQ:AAPL) boasts a lower valuation of 27.8x projections. Furthermore, Alphabet (NASDAQ:GOOG) trades at an even lower 22.5x estimates.
Still, Microsoft’s premium to Apple and Alphabet makes sense given the software firm’s heavy investments into AI and the clout of the Azure platform. The company’s strength in these technologies make its valuation ultimately easy to digest.
On the date of publication, Tyrik Torres did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tyrik Torres has been studying and participating in financial markets since he was in college, and he has particular passion for helping people understand complex systems. His areas of expertise are semiconductor and enterprise software equities. He has work experience in both investing (public and private markets) and investment banking.