MSFT’s Identity Crisis: Stuck as an ‘Old Man’s Stock’ or Poised for a Tech Rebirth?

Stock Market

I bought Microsoft (NASDAQ:MSFT) stock years ago at $50 and let the shares ride. Today MSFT stock trades around $369, plus the $3/year dividend represents a fat 6% yield on my original investment..

But the question is always where do we go from here? If you have $370 lying about, do you put it into Microsoft stock or look elsewhere?

The AI Bull Case

The bull case for Microsoft is built around Generative AI. Many analysts believe AI will let Microsoft overtake Apple (NASDAQ:AAPL) as the world’s most valuable company. (Apple’s current lead of $250 billion means it’s less than 10% ahead.)

Microsoft has already rolled out Generative AI to business customers as CoPilot, at $30 per month per user. The base 365 package prices start at $6 per month so this is a huge hike.

But early reports on corporate uptake are positive. Microsoft is claiming big productivity gains in office communications. CoPilot could deliver $10 billion in additional revenue in 2026, one analyst says.

Microsoft’s dance around OpenAI is already a business legend, with CTO Kevin Scott taking a leading role, believing it could level the playing field for tech users.

CEO Satya Nadella is portrayed as a genius in these accounts, calmly watching the World Cricket final and putting out joint statements with OpenAI CEO Sam Altman.

As the “Year of AI” has gone on, MSFT stock has beat analyst estimates consistently. The beat was 3 cents/share in last December’s quarter. It was 34 cents in the September quarter.

The Bear Case for MSFT Stock

A $10 billion/year win from AI tools, however, is not a big deal on an income statement showing over $200 billion per year of revenue. A third of Microsoft revenue is already net income, so even AI’s extraordinary profit potential doesn’t move the needle.

The Microsoft Azure cloud remains second behind Amazon.Com (NASDAQ:AMZN). The costs of upgrading Azure using Nvidia (NASDAQ:NVDA) chips and software are huge.

Bing remains tiny next to Alphabet’s (NASDAQ:GOOG)(NASDASQ:GOOGL) Google, and it’s got nothing in mobile. Apple isn’t going away, and all these companies will have their own Generative AI plays.

The only area where Microsoft truly dominates is in gaming, but even there XBox sales are down even after its purchase of Activision Blizzard.

Despite its price to earnings ratio of 35, everyone loves Microsoft. Traders at Stocktwits are all bullish but just tired of talking about it.

If everyone’s in, where are the new buyers coming from to push Microsoft higher?

The Bottom Line

Microsoft stock is priced to perfection. Analysts expect growth to accelerate with AI and profitability to remain unbelievably strong. The average estimate for fiscal 2025 is for revenue of $277 billion and net income of nearly $13/share. Microsoft has a way of beating estimates.

In a defensive market, that may be good enough. Microsoft is now the bluest of blue chips. It’s what IBM (NYSE:IBM) was when I started writing about tech 40 years ago.

But is that PE of 35 good value? If we’re entering a new tech boom, there will be many better bets, companies that today are what Microsoft was back in the day.

If I were 28 again, I’d be looking for them. MSFT stock is for old men.

As of this writing, Dana Blankenhorn had LONG positions in MSFT, AAPL, GOOGL, AMZN and NVDA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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