Microsoft Stock Shows Promise, despite Valuation Concerns

© Reuters. Microsoft Stock Shows Promise, despite Valuation Concerns

Microsoft (NASDAQ:MSFT) is perhaps the world's leading tech giant when it comes to complete software solutions.

With a flawless execution strategy, this company has derived superb long-term performance for shareholders. This performance has actually improved during the pandemic, providing another boost to this hyper-growth stock.

The company's share price has hit what many believe to be peak prices. Yet, many investors continue to pile into MSFT stock, despite its ballooning valuation. (See Microsoft stock charts on TipRanks)

This is now a company that's worth more than $2.2 trillion, an absolutely incredible sum of money, and the second-highest valuation in stock market history.

Many would argue that Microsoft's valuation is warranted. The company's underlying suite of products and services is impressive. Investors looking for growth have a reliable long-term champion in this regard with Microsoft.

Others remain uneasy. Perhaps the recent market-driven rally has been too much for value investors. Over the past week, we saw more selling than we have in quite some time. Accordingly, maybe now is the time to take some profits off the table.

I'm still bullish on the stock, despite the potential for volatility on the horizon.

MSFT Stock Comes with Ambitious Growth Narrative

MSFT investors are buying into a company with strong business fundamentals, as well as a strong growth outlook for the long-term. In fact, there are a number of investors who think Microsoft's growth narrative is one of the best in the market right now.

Now, Microsoft's time in the market may be a reason investors overlook this growth champion. After all, a company that's been around since the previous tech bubble can't have any more innovative lead left in its pencil, right?

Not so fast. Microsoft's increasing focus on its cloud technology and other growth segments is impressive. This is a company with a world-class management team that has done well to spur growth in recent years. Expectations are that Microsoft could grow its revenue by nearly 12% for some time. That's impressive, especially for a company of Microsoft's size.

Additionally, Wall Street estimates imply earnings per share will double to nearly $16 in the coming five years. Microsoft does have an impressive track record in this regard, thanks to its generous buyback program, and growth-oriented business model.

Of course, the past two quarters have been impressive for MSFT stock due to Microsoft's strong top- and bottom-line results. The company posted bottom-line gains of 44% year-over-year this past quarter, with revenue growing by 19%. As demand continues to increase for Microsoft's core product suite, and the work-from-home trend comes into play once again with the Delta variant of COVID-19, anything's possible for this growth stock.

In particular, 39% growth in the company's cloud bookings is notable. If Microsoft can grow this high-margin business rapidly, there's no doubt this valuation makes sense right now.

Or does it?

The Valuations Are Not Wrong

Despite the above positive catalysts, some investors are simply too bearish to go near any high-growth stock today. That sentiment sure seems to make sense, given the elevated valuation of the overall market right now.

However, there are reasons for these higher valuations right now. Interest rates remain near historic lows, and are likely to for some time. Investors seeking a reasonable return on their capital have few places to put it.

Given the momentum in growth stocks, it's hard to ignore the wealth-creating impacts of long-term gems like Microsoft.

What Are Analysts Saying about MSFT Stock?

As per TipRanks' analyst rating consensus, MSFT stock is a Strong Buy. Out of 22 analyst ratings, there are 22 Buy recommendations.

The average MSFT price target is $332.33. MSFT’s price target lies between a low of $275 per share, and a high of $411 per share.

Bottom Line

Microsoft is in a position to benefit from strong secular trends for a long time.

This company's focus on innovation, and technological superiority in its core segments, are likely to drive continued long-term growth.

Accordingly, investors looking for a mega-cap champion have a great option in MSFT stock.

Disclosure: At the time of publication, Chris MacDonald did not have a position in any of the securities mentioned in this article

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