Azure helps grow by 31% per year. Microsoft's growth momentum has been revealed, and the long-term investment value is worth paying attention to!

Microsoft (NASDAQ: MSFT) has an impressive financial position, strong profitability, and a strong balance sheet. Cloud computing, led by Azure, is an important growth driver, with an annual growth rate of 31%. I found that the company's dominance enabled it to make good use of this growing market. Additionally, Microsoft is investing heavily in generative artificial intelligence (GenAI) through a partnership with OpenAI. This technology has the potential to revolutionize various industries and increase Microsoft's revenue, further enhancing its competitive advantage by integrating artificial intelligence into existing products and services.

As mentioned later in this article, I found that Microsoft's current valuation is reasonable, which reflects investors' expectations for continued growth. From this perspective, it is a good investment choice. It is recommended to go to BiyaPay, search for stock codes on the platform, monitor market trends, and get on the bus at the right time; you can also use the platform as a professional deposit and withdrawal tool for US and Hong Kong stocks, recharge the digital currency into US or Hong Kong dollars, withdraw to bank accounts, and then deposit funds to other brokerage firms to buy stocks.

In my opinion, Microsoft has become one of the leading “Big Seven” with its diversified business model, huge user base, and investment in future technology.

Artificial intelligence is leading the way:Microsoft continues to invest in artificial intelligence, particularly through partnerships with Open AI and integration with ChatGPT, making it a major player in transformative technology. This has the potential to disrupt and redefine software, content creation, and industries, creating huge revenue opportunities for Microsoft.

Cloud Computing Leadership:With Azure, Microsoft is a leader in cloud computing, and the cloud computing market is expected to grow at a compound annual growth rate of 20%. As more businesses move to cloud-based solutions, Azure revenue is expected to continue to grow.

Diversified sources of revenue:Microsoft's diversified business model covers productivity software (Office), cloud computing, social networking (LinkedIn), digital advertising, cybersecurity, video games (XBox), etc., which is conducive to long-term stability and risk reduction. This allows the company to invest in opportunities while its mature products continue to generate revenue.

Microsoft's strong performance in the third quarter of 2024 reflected this growth, exceeding Wall Street expectations, with revenue rising 17% year over year to $61.86 billion, thanks to strong performance in the productivity and cloud sector, both of which were supported by the integration of artificial intelligence. This growth trajectory is further reflected by Microsoft surpassing AAPL as the world's most valuable company in 2024, reflecting confidence in its growth plans.

In this article, my goal is to find out if MSFT is a reliable candidate for my potentially valuable portfolio. To this end, I'll explore various factors such as management efficiency, company strategy, and valuation metrics to determine whether it fits this investment style.

Satya Nadella has a very high approval rating on Glassdoor, as does Microsoft. He has been with Microsoft since 1992 and currently serves as Chairman and CEO. This long tenure, combined with about 70% of his salary being a stock reward, shows that he is highly compatible with Microsoft's long-term success.

After the last earnings call, I discovered that Microsoft's growth plans are closely linked to artificial intelligence. Here are a few highlights of what I've found:

Focus on Gen AI:Focus on products like Copilot through partnerships with OpenAI and ChatGPT integration. He acknowledged that the adoption of artificial intelligence will be promoted faster than previous technology.

AI on Azure:Nadella sees Azure as a key AI platform with strong growth potential. He pointed out that Azure will become the standard protocol for AI projects and will be used by well-known companies such as ChatGPT. They also saw opportunities for related services such as data storage and developer tools.

Artificial intelligence adoption challenges:The widespread adoption of artificial intelligence requires cultural changes within organizations, including process simplification and automation. Microsoft sees itself as a partner in this transformation.

Amy Hood (Amy Hood), who has been Microsoft's chief financial officer since 2013, oversaw strong financial results during her tenure. Under her leadership, Microsoft has maintained a stable ROE and ROA, which indicates its efficient use of resources. However, I found that the growth in free cash flow did not keep up with the other “Big Seven.” I think this is probably due to significant investment in artificial intelligence, which is Microsoft's future strategic move.

During the earnings call, she explained Microsoft's spending strategy on artificial intelligence. Amy emphasized the importance of investing in infrastructure to meet growing demand. She sees artificial intelligence as “the next wave of cloud infrastructure,” and believes these investments will secure Microsoft's leadership. On the challenge side, she acknowledged that there are temporary capacity limits on Azure consumption, but Amy promised that Copilot's capacity won't be limited. The focus is on optimizing resource allocation to ensure user growth for each user business.

Overall, I found that Microsoft's leadership conveyed a positive message about its growth plans, focusing on artificial intelligence and its interplay with Azure cloud products. I found that the company is doing well financially and has good prospects for future development. I have confidence in management because I've been with the company for many years and have extensive industry experience, and because of their success over the past few years, I tend to give management a score that “exceeds expectations.”

I've found that Microsoft's current growth strategy depends on two main pillars:

Cloud computing dominance:They aim to solidify their leading position in cloud computing with Azure. This includes leveraging proven products like Office 365, aggressive pricing strategies, and a focus on scalability and security to attract new enterprise customers.

Artificial intelligence leadership: Microsoft invests heavily in artificial intelligence (especially Gen AI) and integrates it into various products (Azure, Copilot). This not only enhances existing products, but also makes it a leader in artificial intelligence bringing transformative potential to enterprises.

By focusing on proven cloud services and cutting-edge artificial intelligence solutions, Microsoft seeks to achieve sustainable growth across all of its business units.

Here's a table I've created that lists the main differences between Microsoft and some companies in the industry that provide similar services:

MSFT's current stock price is around $453.55. Since the last earnings report was released at the end of April, the stock has risen about 13% to a record high. The stock is up about 21.05% this year so far, about 330 basis points higher than the S&P 500 return.

Now, to assess its value, I've used an 11% discount rate that reflects the minimum return investors can expect from their investments. Here, I'm using a 5% risk-free interest rate, plus an additional market risk premium for holding stocks compared to risk-free investments, and I'm using 6% as that risk premium. While this value can be further refined, lower or higher, I'm only using it as a starting point to measure using unbiased market expectations.

Then, using a simple 15 year+10 year two-stage DCF model, I inverted the formula to solve for the high growth rate, that is, the first stage of growth.

To achieve this goal, I'm assuming a 4% terminal growth rate for the second phase. Predicting growth after 15 years is challenging, but in my experience, the 4% growth rate reflects a more sustainable long-term trajectory for mature companies, which should approach historical GDP growth rates. Again, these assumptions can be higher or lower, but in my experience, due to the nature of the business, I'll use a 4% growth rate as the benchmark scenario。The formula used is:

$453.55 = (sum^15 EPS (1 + “X”)/1+r) + TV (sum^10 EPS (1+g)/(1+r))

Solve x = 16.7%

This indicates that the market currently believes Microsoft's earnings per share will increase by 16.7%. According to Seeking Alpha analysts' consensus, EPS will grow at a CAGR of 13.72% over the next 3-5 years. So, in my opinion, Microsoft's fundamental valuation is reasonable.

Additionally, I'll look at its expected price-earnings ratio to growth rate (PEG) ratio, which is 2.80 times compared to the industry median value of 2.05 times, which means the stock price is slightly higher than the industry level. However, the company's valuation is still reasonable compared to the group of companies highlighted below that are considered industry leaders.

However, I believe Microsoft still has a lot of potential, and it's already harnessing artificial intelligence through all of its products, cloud solutions, and investments (Open AI). So I think its valuation is worth a premium, not just a fair valuation. Therefore, I tend to start reporting on Microsoft with a buy.

Microsoft has maintained a positive momentum since the last time earnings were announced. Since then, the stock has continued to hit record highs. However, from a technical perspective, the stock is well valued, and its 1-year average RSI is in the neutral zone of 54.84, below the 14-day moving average of 67, which indicates that the share price may be changing the trend.

I set MSFT's resistance level at an all-time high of $468.35, and the support level was set at 10% lower than its previous trading price when it made a profit of around $400. The company's profit date is July 25.

Microsoft offers an attractive long-term investment opportunity. Their financial strength, continued profitability, and healthy balance sheets are a source of confidence. Azure has made them leaders in the booming cloud computing market. Additionally, Microsoft is at the cutting edge of artificial intelligence through partnerships with companies such as Open AI, which has the potential to disrupt the industry and create new revenue streams. Their diverse business model includes software, cloud, gaming, and advertising, reducing risk.

While I think Microsoft's valuation is reasonable, I think the stock is worth the premium. Microsoft's focus on innovation, particularly in the field of artificial intelligence, has given them long-term success. So I think Microsoft is still worth buying.