Following the earnings announcement, Microsoft stock saw a decline, yet the long-term prospects are still quite promising.
In recent years, investors have been increasingly drawn to artificial intelligence (AI). With recent developments in generative AI, there’s a sense of optimism about its potential benefits for financial results.
Some stocks have skyrocketed in value, leaving newer investors feeling somewhat left out. But even if your budget is as modest as $400, there are still many avenues worth exploring. The AI sector leader isn’t exactly out of reach right now—with shares available for under $500.
Significant Investment Opportunity in Tech
Despite a sell-off after the latest earnings report from Microsoft, this could be a smart chance for savvy investors to scoop up shares at a lower price.
The stock’s decline primarily stems from increased capital expenditures (Capex) for AI data center development, with the company spending $37.5 billion last quarter—a figure that exceeded analysts’ predictions.
Growth in Azure, Microsoft’s cloud computing arms, was reported at 39%, in line with expectations, but investors were hoping for even higher revenue driven by increased capital outlay. Still, management notes that demand continues to surpass supply.
Increased capital investment could exert pressure on profit margins, especially since depreciation costs will rise significantly. Management indicates that depreciation will accelerate, as a large portion of the spending is on short-lived assets.
Nonetheless, the long-term outlook for Microsoft is very encouraging. Remaining performance obligations rose by 110% year over year, reaching $625 billion. Approximately $250 billion of this comes from a new agreement with OpenAI, but executives mentioned that even without this contract, the backlog would have grown by 28%.
OpenAI currently represents 45% of this backlog, presenting some risk related to customer concentration. Nevertheless, even when setting aside OpenAI’s impact, Microsoft retains considerable growth potential.
The software segment is also performing well. The company seems to have been swept up in a broader sell-off in software stocks, prompted by worries that AI might supplant many enterprise software solutions. However, Microsoft’s own results reflected otherwise, with the Productivity and Business Processes division up 14% year over year, adjusted for constant currency.
High-margin software services and increasing cloud fees create a healthy cash flow to support AI data center initiatives. Despite elevated expenditures last quarter, free cash flow remained at $5.9 billion.
With the recent dip, the stock is trading around $400 per share as of now. At 24 times forward earnings, the stock price has dropped to levels not seen in a long while. This price certainly marks it as a potentially lucrative investment.
