So far, in 2023, the enterprise and personal software giant has made a lot of money. Is this just the beginning?
So far, in 2023, Microsoft (MSFT 1.05%) has had a great year thanks to a general rise in technology stocks. So far this year, shares of the tech giant are up 15%, which is more than three times as much as the S&P 500. This is very different from what happened in 2022 when the stock fell by more than 28%.
This year’s rally came after the company’s financial results came out on January 24 and were better than expected. Investors are more confident that Microsoft will be able to take advantage of a few large and growing opportunities in the coming year because of how well it has handled macroeconomic problems.
What does this mean for investors who missed the recent rise in Microsoft stock? Should they buy the stock in hopes of making more money, or should they stay away from it because of its high price and the ongoing crash of the PC market? Let’s look more closely.
Why has Microsoft stock been going down?
Microsoft’s business is strong because it has many different types of products and services. However, a big part of its income still comes from the PC market, which has been in a long-term decline and has been hit hard by the recession. Microsoft’s more personal computing segment, which has historically made up nearly a third of its revenue, was down 19% year over year to $14.2 billion in the second quarter of its fiscal year 2023, which ended on December 31. This was the second quarter in a row that year-over-year revenue was down.
The good news is that the bottom of the PC market may be closed. Erik Woodring, a Morgan Stanley analyst, cut his PC estimates for 2023 again, but he thinks the worst is over and that the market will hit its bottom as soon as this quarter.
What could make the stock of Microsoft go up?
Microsoft has more reasons for its stock to go up than just a recovery in the PC market.
Azure, its cloud infrastructure service, is the most important one. Synergy Research Group’s data shows that Microsoft’s share of the global cloud infrastructure market grew quickly in 2022, reaching 23%, up from 21% in the four quarters before that. In fact, over the past five years, Microsoft has gained the most market share of any company in its field. Since 2017, it has grown by almost 11 percentage points. Since the company’s market share has grown steadily over the past few years, there’s every reason to think that this trend will keep going.
There’s also the matter of ChatGPT and how AI is becoming more useful (AI). Microsoft has put at least $10 billion into OpenAI, the company that made ChatGPT, and is already working on adding ChatGPT’s features to its Bing search engine. The goal is clear: to take some search market share away from Alphabet’s Google, which controls more than 90% of the market. Even small gains in market share could be big business, though, because Google controls more than 90% of the market. Microsoft thinks that for every 1% of the market it gains, it can make an extra $2 billion.
Even though it’s too soon to tell how successful these efforts will be, you can feel how excited people are about ChatGPT. This suggests that fervor could help Bing get more people to use its search engine.
How to think about Microsoft stock right now
Microsoft is selling for 31 times its last year’s earnings and ten times its last year’s sales. Value investors might be put off by how much the company is worth, but I think that’s a fair price to pay for a company that’s expected to grow its revenue and earnings per share by double digits by 2024.
As I’ve said above, Microsoft’s stock could go up a lot over the next few months and years because of a number of factors. Smart investors who don’t mind a little bit of uncertainty should think about buying now, especially given Microsoft’s stability and its strong long-term prospects in the high-growth areas of cloud computing and artificial intelligence (AI).