As the year winds to a close, the Dow Jones Industrial Average has trailed the other two major market indexes with a return of about 9% year to date (YTD). That’s far short of the S&P 500 and Nasdaq, which are up by about 20% and 36%, respectively, this year.
One of the top performers on the Dow this year has been technology giant Microsoft (NASDAQ:MSFT), which is up by about 55% YTD. As we head into 2024, it remains the best stock to buy on the Dow right now.
Riding the AI wave
Artificial intelligence has been one of the biggest drivers of the market in 2023, and Microsoft is firmly positioned at the forefront of this rapidly evolving and surging market. Microsoft has gone all in on its “copilots,” the new name for its AI-infused Bing Chat. More broadly, the term refers to the AI functions it brings as a companion to its products, like Windows, Microsoft 365 and others.
“With copilots, we are making the age of AI real for people and businesses everywhere,” Chairman and CEO Satya Nadella said in Microsoft’s fiscal first-quarter earnings report. “We are rapidly infusing AI across every layer of the tech stack and for every role and business process to drive productivity gains for our customers.”
Although Microsoft is applying AI across its product lines, the most concentrated use of the technology is probably in its Intelligent Cloud business, which includes the Azure cloud-computing platform. This segment has been growing rapidly, with its revenue rising 19% year over year in the most recent quarter to $24 billion. Within the cloud-computing segment, the Azure business alone saw a 29% revenue increase.
Overall, the intelligent-cloud business accounted for about 43% of Microsoft’s $56.5 billion in revenue. That’s not to mention its sizable $13 billion investment in ChatGPT developer OpenAI. Microsoft briefly had brought on board ousted OpenAI CEO Sam Altman, but OpenAI re-hired him. However, Microsoft’s stake in the company remains, and it has a non-voting seat on OpenAI’s board. ChatGPT is also hosted on the Azure platform through OpenAI’s partnership with Microsoft.
Further, AI has helped Microsoft increase its market share in the cloud-computing world, with its market share up to 23% from 21% a year ago. It still trails Amazon (NASDAQ: AMZN), but it is eating into Amazon’s 32% share, largely due to the strength of its AI capabilities.
Microsoft has been resilient
While the focus on AI has transformed the company, it still has multiple revenue streams that allow it to navigate market volatility better than most of its competitors. Microsoft’s only negative year since 2011 was 2022, when its stock price fell 28%, but that was still better than many of its tech competitors. In fact, that performance even beat the Nasdaq. Over the past 10 years as of Dec. 11, Microsoft has posted an average annual return of 25.7%.
The company recently closed on its acquisition of game developer Activision Blizzard, which will bolster the gaming side of its business. However, for its fiscal Q2 outlook, Microsoft expects revenue growth of 17% to 18% in the Intelligent Cloud business led by Azure, which is projected to see its revenue climb 26% to 27% year over year.
Microsoft has positioned itself to grow along with AI, but it also has the breadth of products — both commercial and consumer — to outperform in volatile markets, which it has done over the years. It is also very reasonably valued, trading at around 35 times earnings. While that valuation is up from a year ago, when Microsoft was trading at around around 24 times earnings, its forward price-to-earnings (P/E) ratio is slightly lower at 33.
Analysts rate Microsoft as a consensus buy, and it has a median price target of $414, which would be up by about 11% from its current price. Although that price is below its average, 2024 could end up being a more muted year for stocks, particularly tech names, after the big run-up in 2023. However, Microsoft has been resilient over the years, and it should be one of the best stocks on the Dow next year — and beyond.
Disclaimer: All investments involve risk. In no way should this article be taken as investment advice or constitute responsibility for investment gains or losses. The information in this report should not be relied upon for investment decisions. All investors must conduct their own due diligence and consult their own investment advisors in making trading decisions.
