To The Moon

$Microsoft(MSFT)$ 's latest announcement of a $60 billion stock buyback program and a 10% dividend increase demonstrates the company's robust financial health and confidence in its future. The move, which replaces a similar buyback program from 2021, is a clear signal to investors that Microsoft remains committed to returning value to shareholders. On top of that, the stock has gained 31% over the past year, further solidifying its dominance in the market. But while I appreciate the shareholder-friendly gesture, I can’t help but wonder if there are better ways for Microsoft to invest its cash reserves, especially in innovation and expansion.

MSFT Daily Chart over 1 Year

Don’t get me wrong, I love seeing a company reward shareholders with buybacks and dividend hikes, but buying back shares at a price-to-earnings (P/E) ratio of 36x feels a little steep. Historically, share repurchases make the most sense when a company’s stock is undervalued. Right now, Microsoft is far from undervalued. At these levels, I’d argue the company could be better off using that $60 billion to fuel further growth, perhaps through hiring more engineers, expanding its product line, or improving existing services. After all, while Microsoft is a titan in the software industry, there are still plenty of areas where they could be doing more.

Microsoft Store

Take the Microsoft Store, for example. Compared to $Apple(AAPL)$ ’s App Store or even Google Play, it’s a joke. It could be a goldmine, especially with the gaming potential in the PC space. Microsoft could easily revamp the Windows Store, cut prices, and make it a real competitor to Steam. But instead, they continue to treat PC gaming like a second-tier priority. Xbox might be struggling to keep up with $Sony(SONY)$ and $Nintendo Co., Ltd.(NTDOY)$ , but Microsoft has a massive PC gaming user base, and yet, they seem unwilling to capitalize on it. If I am looking in the market for a new console, my first thought isn't Xbox—it's PlayStation or Nintendo Switch. Heck, I’d even consider the Steam Deck before an Xbox.

Steam Decks are powerful, portable, PC gaming devices made for comfort and a console-like experience.

On one hand, Microsoft's consistent dividend increases solidify its status as a dividend aristocrat. The company's ability to generate substantial cash flows and return value to shareholders is a positive indicator of its financial health.

MSFT 10Y TTM Dividend Payout

On the other hand, there’s no denying that Microsoft’s bread and butter is in selling to large organizations. Their enterprise solutions—everything from Azure to Microsoft 365—cover so many bases that it’s hard for companies to look elsewhere. The appeal of bundling everything into one package, even if each product is mediocre, is too strong for many CTOs of the large organizations to ignore. Why bother negotiating with multiple vendors when Microsoft offers a one-stop shop? The CTOs and decision-makers don’t have to deal with the day-to-day frustration of using these tools, so they go for the convenience of checking all the boxes at once.

But this kind of culture—focusing on mediocrity rather than innovation—is what’s holding Microsoft back from achieving even greater success. Their engineering approach seems to prioritize cost-cutting over quality, with a focus on delivering products that are just "good enough." And to be fair, from a business perspective, it works. Microsoft is too big to fail, and they're making a killing selling bundled services that meet most needs at a reasonable price point.

That said, I can’t help but feel that this strategy is stifling true innovation. Microsoft could be leading in so many areas—gaming, AI, consumer tech—but they seem content with maintaining the status quo. Sure, they’re investing in AI like everyone else, but they haven’t shown the same level of risk-taking and forward-thinking that companies like Apple or $Alphabet(GOOG)$ have demonstrated. Gaming, for instance, has hit a plateau. The PC gaming market is ripe for disruption, and yet Microsoft continues to fumble the ball.

At the end of the day, Microsoft’s real strength is its ecosystem. The Microsoft 365 suite, along with Azure’s dominance, offers a value proposition that’s hard to beat. If a company tried to piece together the same services independently, it would cost significantly more in both time and money. Microsoft has a stranglehold on the business world, and that’s not going to change anytime soon.

Take Azure AD (or Entra, as they now call it). It might be a terrible name from a marketing standpoint, but it's an indispensable tool for managing access control and multi-factor authentication. For a company starting out, being able to cover 80% of IT needs with a $35/user monthly subscription is incredibly attractive. It’s the legacy systems that get expensive, and Microsoft knows it. That’s why they don’t need to go out of their way to innovate—they’ve already got businesses hooked on their ecosystem.

Microsoft’s $60 billion buyback is undoubtedly a vote of confidence in the company’s future, and the 10% dividend increase is great news for income-focused investors. But from my perspective, the money could be better spent investing in areas where Microsoft still has untapped potential—improving the Windows Store, bolstering their gaming division, or even hiring more engineers to push the envelope on product innovation.

The reality is that Microsoft is so big and entrenched in the corporate world that they don’t have to innovate to stay on top. But imagine what they could accomplish if they put more effort into doing so. At the end of the day, there might not be anything better to invest in than Microsoft stock, but I can’t help but think the company could be doing more with the vast resources it has at its disposal.

Conclusion

Microsoft’s $60 billion buyback is undoubtedly a vote of confidence in the company’s future, and the 10% dividend increase is great news for income-focused investors. But from my perspective, the money could be better spent investing in areas where Microsoft still has untapped potential—improving the Windows Store, bolstering their gaming division, or even hiring more engineers to push the envelope on product innovation.

The reality is that Microsoft is so big and entrenched in the corporate world that they don’t have to innovate to stay on top. But imagine what they could accomplish if they put more effort into doing so. At the end of the day, there might not be anything better to invest in than Microsoft stock, but I can’t help but think the company could be doing more with the vast resources it has at its disposal.

What are your thoughts on Microsoft’s buyback?

Should they be investing more in innovation, or is this just the best use of their capital in the current market?

Let’s discuss! [Smart]

Follow @MillionaireTiger @Tiger_SG @Daily_Discussion @TigerStars @CaptainTiger

Disclaimer: This is a general analysis and not financial advice. Always conduct your own research before making any investment decisions.