Why Microsoft Stock Is the Pick of the Magnificent Seven Litter

InvestorPlace05-12

Microsoft (MSFT) stock is a buy because it’s a free cash flow machine. The company is only getting started with AI-related revenue generation. Its gaming business is giving Windows a run for its ...

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stock is a buy because it’s a free cash flow machine. \nThe company is only getting started with AI-related revenue generation.\nIts gaming business is giving Windows a run for its money. \n\n\n\n\n\n \n\nSource: NYCStock / Shutterstock.com\n\n\n\nOver the past five years, Nvidia (NASDAQ:NVDA) has outperformed the other six “Magnificent Seven” stocks combined, including Microsoft (NASDAQ:MSFT) stock, one of this country’s most iconic tech companies. \nIt’s hard to believe that Microsoft CEO Satya Nadella has been the software company’s leader for over a decade, taking the job on Feb. 4, 2014. MSFT stock outperformed three of the seven Mag 7 stocks over the past five years. \nAccording to Morningstar.com, Microsoft’s 10-year annualized total return through May 8 is 26.92%. Most investors would gladly take this kind of long-term return. \nFive-Year Cumulative Returns (through May 9) – Magnificent Seven \nCompany5-Year Return Nvidia2,002.51%Microsoft224.33%Tesla (NASDAQ: TSLA)976.83%Apple (NASDAQ:AAPL)274.38%Alphabet (NASDAQ:GOOG)194.76%Meta Platforms (NASDAQ:META)152.43%Amazon (NASDAQ:AMZN)100.53%Even with Tesla’s outstanding performance, Nvidia’s cumulative return outperformed the other six Magnificent Seven stocks by 79.25%, a remarkable feat. \nSo the question becomes one about the next 10 years. \nIf Nadella stayed for the entire decade, which is unlikely, could the MSFT stock outperform the past decade? It could. \nHere are some reasons why. \nAI and MSFT Stock\nMicrosoft reported Q3 2024 results at the end of April. Its Intelligent Cloud segment, which includes Azure, had revenue of $26.7 billion, 21% higher than a year ago. Azure’s revenues grew 31% year-over-year, 300 basis points higher than the analyst estimate. \nPerhaps even more critical was the seven percentage point contribution from AI products during the quarter, up from 6% in Q2 2024 and 3% in Q1 2024.   \nOne area where Microsoft is using AI to grow market share is with Bing search and its Edge browser. Thanks in part to Copilot’s integration into Bing and Edge, the browser now has 140 million daily active users. \nData analytics is another area that’s becoming a more significant part of its AI business. A year ago, it launched Fabric, an end-to-end, unified analytics platform. \nAs Nadella said in the Q3 2024 conference call, Fabric has over 11,000 paying customers, including big businesses such as Equinor (NYSE:EQNR) and Foot Locker (NYSE:FL).    \n“Fabric is seamlessly integrated with Azure AI Studio, meaning customers can run models against enterprise data that is consolidated in Fabric’s multi-cloud data lake, OneLake,” Nadella said. “And, Power BI, which is also natively integrated with Fabric, provides business users with AI-powered insights. We now have over 350,000 paid customers.”\nMorgan Stanley estimates that the Intelligent Cloud segment’s revenue will grow by 20% annually through 2029, generating annual revenue of $257 billion. \nBased on a price-to-sales ratio of nearly 13.0, this segment would be valued at $3.34 trillion by 2029, $280 billion more than its current market capitalization for the entire company. \nGaming Closing in on Windows\nThanks to the acquisition of Activision Blizzard for $75.4 billion in October 2023, Microsoft’s gaming business generated $16.48 billion in revenue in the first nine months of fiscal 2024, 38% higher than a year earlier, within $277 million of its Windows business, the company’s third-largest revenue generator. \nThat’s the good news. \nThe bad news is that the acquisition has to be paid for, which means job cuts are happening across the segment. In January, it announced that 1,900 people (8% of the gaming division’s workforce) would be laid off from Activision Blizzard and Xbox. Activision president Mike Ybarra left the company as part of the headcount reduction, Call of Duty general manager Johanna Faries was promoted to replace him. \nOn May 7, Microsoft announced the closure of several game developer studios in the U.S., Canada, and Japan so that it could focus on its highest-impact video game titles. \nWhile there are arguments against closing the studios, Microsoft will do what’s best for the entire company, not just for gamers. Ultimately, xBox and Activision are for-profit businesses.     \nOperating Margins Continue Rising \nPart of maintaining above-average operating margins is judiciously controlling operating expenses. That doesn’t mean they won’t increase, but they shouldn’t dramatically outpace sales growth. \nIn the first nine months of 2024, its operating expenses were $44.46 billion, 4.9% higher than a year earlier, while revenues rose by 15.8%, more than 3x higher. As a result, its operating margin was 45.2%, 390 basis points higher than a year earlier. \nThanks to year-over-year increases in gross and operating margins, its free cash flow increased by 28% to $50.75 billion. \nThat’s how you run a successful business.  \nWhile I like Nvidia and Amazon, Microsoft could be the best long-term buy of the Magnificent Seven. \nOn the date of publication, Will Ashworth 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.\nWill Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.Technology, Artificial Intelligence, Cloud, Consumer Discretionary, Retail, Software \n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\nSubmit\n\n\n\n\n\n\n\nArticle printed from InvestorPlace Media, https://investorplace.com/2024/05/why-microsoft-stock-is-the-pick-of-the-magnificent-seven-litter/.\n©2024 InvestorPlace Media, LLC","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":1,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.0","shortVersion":"4.29.0","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2434333942"}