This ‘Magnificent Seven’ stock hit an all-time high for a good reason

microsoft (MSFT -0.15%) It is part of the “Magnificent Seven” and was the first term used. american bank Analyst Michael Hartnett discusses seven large technology-focused companies. Nvidia, meta platformand Amazon (These are also Magnificent Seven companies) outperforming Microsoft so far this year. But Microsoft could be an even better buyer going forward.

On March 14th, Microsoft hit an intraday high of $427.82 and a closing high of $425.22, but fell back the next day. adobe‘s weak guidance had ripple effects throughout the tech industry.

The world’s most valuable company, Microsoft is the only company worth more than $3 trillion and currently accounts for 7.3% of the world’s value alone. S&P500 Index that exceeds the entire materials, real estate, and utilities sectors Combined!

Here’s why Magnificent Seven stock could go even higher from here.

Image source: Getty Images.

hidden in plain sight

Whether it’s buying something on sale, taking advantage of a promotion, or getting a lower interest rate, it’s human nature to want a good deal. Stock market declines happen all the time, and investors who take advantage of them have historically done very well.

But far too many investors miss out on profits during bull markets simply because it’s counterintuitive to buy stocks at much higher prices than before. Often the best stocks to buy are hidden in plain sight. Microsoft is probably the best example.

The company became the largest U.S. company by market capitalization in the late 1990s, lost that position with the dot-com bust, but regained it in the early 2000s. exxon mobilIt sold off heavily after the 2008 financial crisis and did not exceed the highs of the dot-com bubble until 2017.

Facebook (current meta-platform), Amazon, NetflixGoogle (part of the parent company) alphabet) introduced to highlight the hottest growth stocks on the market. But it was always growing through cloud infrastructure. Microsoft was the lead investor in his OpenAI. What’s more, the company’s business was perfectly set up to monetize AI in the short and long term.

In 2017, investors were happy that Microsoft had recovered its losses following the dot-com bust. But the stock is now up more than five times since that peak, and is up nearly 250% in the past five years alone. Microsoft has had periods of slow growth. But through it all, the company laid the foundation for growth over time.

Even today, Microsoft’s all-time high stands out as one of the most valuable large-cap growth stocks.

Rapid monetization of AI

On March 13, Microsoft announced that Copilot for Security will be generally available worldwide on April 1, 2024. Microsoft said in its fiscal second quarter 2024 earnings call that Copilot for Security has more than 1 million customers.

This cybersecurity solution uses AI to protect against intrusion and could help protect cloud infrastructure, power Microsoft Azure, and accelerate growth in Microsoft’s Intelligent Cloud business segment, among other things. According to Microsoft, when a security expert uses Copilot for Security, he is 22% faster and 7% more accurate.

Copilot for Security joins a growing list of Copilot products, including GitHub Copilot for developers, Copilot for Microsoft 365, DAX Copilot for healthcare, and other AI products such as Azure AI and AI capabilities for LinkedIn.

In a relatively short period of time, Microsoft has successfully leveraged AI across its business-to-business and business-to-business sales channels, accelerating growth in the process.

solid foundation

Microsoft’s growth has been a major factor in the stock’s phenomenal rise. However, an often overlooked part of investment theory is the capital return program and balance sheet.

Microsoft pays more dividends than any other US-based company. Over the past three years, the company has increased its dividend by more than a third and reduced its overall stock count, even as stock-based compensation expense ballooned to more than $10 billion in the following 12 months. I did.

MSFT shares raw data from YCharts

Microsoft uses stock-based compensation to attract top talent, which has been a successful strategy. Microsoft is driving profit growth, and share buybacks can more than offset its expenses. This is a very different move from companies that do not buy back their own shares and instead dilute existing shareholders with stock compensation.

In terms of its balance sheet, the company had $17.3 billion in cash and cash equivalents, $63.7 billion in short-term investments (i.e., government bonds and bonds), $27.0 billion in short-term debt, and $27.0 billion in government debt as of December 31, 2023. The total amount is 44.9 billion dollars. long term debt.

Despite rapidly increasing operating expenses and capital expenditures over the past few years (not to mention fueling share buybacks and dividend increases), the debt on Microsoft’s balance sheet remains cash, Less than the equivalent, short-term investment.

Separate companies from stock prices

One look at Microsoft and it’s easy to say the stock is overvalued and worth selling. With all-time highs and strong gains over the years, it appears ripe for a sale. The price-to-earnings ratio (P/E) is up to 37.7x, well above the five-year average P/E of 32.1, and the 10-year median is below 30. And the market as a whole is recovering well. It is scheduled for 2024 after a major sale in 2023.

Despite this situation, Microsoft still The quality and diversification of the company’s business, market position, capital return program, balance sheet, and most importantly, a clear and defined roadmap to monetize AI for years to come. is not overrated.

Microsoft is a complex business, but its strategy is very simple. There are many touchpoints with businesses and consumers, and you use those touchpoints to see what works and what doesn’t in your products and services. Now, we’re just taking that strategy one step further with AI. It sounds flashy, but it only improves on what Microsoft is already doing well.

Microsoft isn’t a cheap stock, but it’s rising for good reason, giving investors confidence in the company’s future performance and continued strength across the market.