Microsoft (NASDAQ: MSFT) stock might not show up on many investors’ radars today given its rally so far in 2023. The tech giant has gained over 30% this year, more than doubling the rally in the S&P 500 index.
That spike has lifted Microsoft’s valuation to a level that might make it hard for shareholders to see market-beating returns in the short term. But investing isn’t about the next quarter or even the next year. With that idea in mind, let’s look at where Microsoft stock might be headed by 2026.
The company recently concluded an excellent fiscal year. Annual revenue rose 11% after accounting for currency exchange rate swings, to $212 billion. Operating earnings rose 14% to $90 billion, or over 40% of sales. That profit margin makes Microsoft among the most efficient companies on the planet and demonstrates the financial power of its tech empire.
Digging into the details, there was a lot for investors to feel excited about heading into fiscal 2024. Sure, Microsoft’s PC business shrank, and the tech products niche showed weak demand following the pandemic spike. But the company cashed in on the trend of enterprises shifting their businesses to the cloud. Its web services and intelligent cloud divisions expanded at a healthy clip, picking up the slack from other segments.
Technology moves quickly, so it’s hard to predict with much detail what the tech world will look like in a few years. Yet we know that a few themes will likely dominate. Those include cloud services, the digital transformation, AI, and cybersecurity.
Microsoft has exposure to each of these areas, and management is especially excited about its cloud and AI opportunities. “We remain focused on leading the new AI platform shift,” CEO Satya Nadella said in a press release .
Microsoft isn’t alone in this goal, though. And it faces stiff competition from Amazon and others in its web services platform. But its excellent market position, brand power, and scale likely mean it will remain among the tech leaders in a few years.
The stock’s rally in 2023 suggests that investors are optimistic about its prospects both in the short term and over the next few years. If its most recent quarter is any indication, then the financial wins could be significant. Microsoft boosted operating income by 21% to $24 billion in the fiscal fourth quarter. Net income was a blazing $20 billion — up 23%.
Still, investors might want to watch the stock for signs of a better entry point. At over 11 times annual sales, shares have become more expensive compared to the start of the year when they were trading at below 9 times sales.
You can own individual companies that each compete in a small portion of Microsoft’s territory for much cheaper. The cybersecurity expert Palo Alto Networks trades at 10 times sales, for example, and video game giant Electronic Arts is valued at 4 times sales.
But Microsoft delivers exposure to these niches and a half-dozen more, all wrapped up under a single brand. That diversity makes it an obvious choice for most enterprises seeking comprehensive tech services. It also makes it an attractive stock to have in your portfolio. As a result, owning Microsoft stock over the next several years will likely have a positive impact on your portfolio, despite its high price today.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Demitri Kalogeropoulos has positions in Amazon.com. The Motley Fool has positions in and recommends Amazon.com, Microsoft, and Palo Alto Networks. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.
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