Large-cap stocks make profitable and safer investment opportunities since these mammoth companies are more established than smaller companies and have more reliable profit streams. The primary advantage of adding large-cap stocks to an investment portfolio is their stability, as they tend to be the least sensitive to macroeconomic headwinds.

With experts forecasting a recession this year due to high inflation, continued interest rate hikes, and other macroeconomic concerns, investors could consider investing in fundamentally sound large-cap stock Microsoft Corporation (MSFT).

According to a report by The Business Research Company, the global software products market is expected to reach $2.36 trillion by 2027, growing at a 12% CAGR. The software industry is primarily benefiting from the pandemic-induced accelerated digital transformation worldwide. Increased cloud-computing adoption should boost the industry’s growth.

With a $1.80 trillion market cap, software powerhouse MSFT is primarily gaining from the ongoing cloud transition.

Satya Nadella, MSFT’s chairman and CEO, said, “The next major wave of computing is being born, as the Microsoft Cloud turns the world’s most advanced AI models into a new computing platform. We are committed to helping our customers use our platforms and tools to do more with less today and innovate for the future in the new era of AI.”

The company’s Cloud revenue was $27.10 billion, up 22% year-over-year, as its commercial offerings continue to drive value for its customers. MSFT’s Azure infrastructure and other cloud computing services posted higher growth than expected during the quarter.

On January 23, 2023, the tech giant announced a new multiyear, multibillion-dollar investment in San Francisco-based research outfit OpenAI, which grabbed headlines last month with the launch of ChatGPT. The deal marks the third phase of the partnership between the two companies, following MSFT’s previous investments in 2029 and 2021.

The renewed partnership is expected to accelerate breakthroughs in AI and help both companies commercialize advanced technologies in the future.

MSFT has a record of increasing its dividend for 18 consecutive years. It pays a $2.72 per share dividend annually, which translates to a 1.12% yield on the current price. Its four-year average dividend yield is 1.03%. The company’s dividend payouts have grown at a 10.4% CAGR over the past three years. It declared a quarterly dividend of $0.68 per share, payable to shareholders on March 9, 2023.

Given MSFT’s solid fundamentals and reliable dividend payments, this tech stock is extremely popular among investors on Wall Street. The stock has gained 2.3% over the past month. Furthermore, Wall Street analysts expect the stock to hit the average price target of $282.16 in the near term, indicating a 16.6% upside potential.

Here is what could influence MSFT’s performance in the upcoming months:

Robust Financials

For the fiscal 2023 second quarter ended December 31, 2022, MSFT’s revenue increased 2% year-over-year to $52.75 billion. The company’s revenue from Productivity and Business Processes segment grew 7% from the prior-year period to $17 billion, while revenue from the Intelligent Cloud segment rose 18% year-over-year to $21.50 billion.

As of December 31, 2022, the company’s cash and cash equivalents were $15.65 billion, compared to $13.93 billion as of June 30, 2022. Also, its current liabilities reduced to $81.72 billion, compared to $95.08 billion as of June 30, 2021.

Favorable Analyst Estimates

Analysts expect MSFT’s revenue for the fiscal year (ending June 2023) to come in at $212.76 billion, indicating an increase of 7.3% year-over-year. The consensus EPS estimate of $9.56 for the current year indicates a 3.5% year-over-year increase. Also, the company has surpassed the consensus revenue and EPS estimates in three of the trailing four quarters.

Furthermore, the company’s revenue and EPS for the next fiscal year (ending June 2024) are expected to grow 12.6% and 16.2% from the previous year to $239.50 billion and $11.07, respectively.

High Profitability

MSFT’s trailing-12-month gross profit margin of 68.26% is 37.8% higher than the 49.53% industry average. Its trailing-12-month EBITDA margin of 48.67% is 320.5% higher than the 11.58% industry average. Likewise, the stock’s trailing-12-month net income margin of 34.37% is 966.5% higher than the industry average of 3.22%.

Furthermore, MSFT’s trailing-12-month ROCE, ROTC, and ROTA of 42.88%, 21.97%, and 19.40% compare to the industry averages of 4.75%, 3.21%, and 1.52%, respectively. Its trailing-12-month levered FCF margin of 22.73% is 202.9% higher than the 7.50% industry average.

POWR Ratings Show Promise

MSFT has an overall rating of B, translating to a Buy in our POWR Ratings system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight distinct categories. MSFT has a Quality grade of B, in sync with its higher-than-industry profitability metrics.

MSFT is ranked #9 out of 52 stocks in the Software-Business industry.

Beyond what I have stated above, we have also given MSFT grades for Sentiment, Value, Growth, Momentum, and Stability. Get access to all MSFT ratings here.

Bottom Line

MSFT continues to expand into new areas of the digital economy, including cloud computing and AI, while maintaining its leading position in traditional software licensing. Moreover, MSFT recently announced a new multibillion-dollar investment in ChatGPT-maker OpenAI, accelerating AI breakthroughs and boosting the companies’ profitability.

Given robust financials, a diversified business model, high profitability, attractive dividends, and promising growth prospects, it could be wise to invest in MSFT.

How Does Microsoft Corporation (MSFT) Stack up Against Its Peers?

MSFT has an overall POWR Rating of B. One could also check out these other stocks within the Software-Business industry: Yest, Inc. (YEXT) with an A (Strong Buy) rating, and Amdocs Ltd. (DOX) and Agilysys, Inc. (AGYS) with a B (Buy) rating.

MSFT shares were trading at $237.16 per share on Wednesday morning, down $4.88 (-2.02%). Year-to-date, MSFT has declined -1.11%, versus a 3.61% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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