That was a little over six years ago Apple became the world’s first billion-dollar company. Now there are several others with market caps over $1 trillion, and a handful of companies valued at over $3 trillion.
The stock market can do just about anything in the short term, so it’s impossible to know how a company will do in 2025. Microsoft (NASDAQ: MSFT) has everything it takes to chart a path to steady growth, which can’t be said for all companies valued at over $1 trillion
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This is why Microsoft stands out as the best all-around buy among the ultra-megacap growth stocks.
Image source: Getty Images.
What impresses me most about Microsoft is its ability to strengthen the quality of its earnings while continuing to take risks and innovate. In recent years, the company has experienced transformative growth while retaining many of its decades-old software solutions.
The company has integrated artificial intelligence (AI) into its highly profitable Intelligent Cloud segment. It continues to expand its AI assistant tool, Copilot, into the Microsoft 365 software suite and other aspects of its business.
For example, GitHub Copilot has become the most widely used AI-powered developer tool. GitHub’s annual revenue now stands at $2 billion, according to its fourth-quarter fiscal 2024 earnings call.
On October 21, Microsoft announced new autonomous agents that can be assigned specific tasks through Copilot Studio. Companies can create agents for simple administrative tasks, such as processing sales orders. Agents can help with sales lead generation, data management, customer service, and more. This new product announcement is just one of many examples of how Microsoft is maintaining its established position in various end markets.
Too often we see companies reach a certain size and become bogged down by inefficiencies. Their size works against them, and they lose the innovative spirit that made them successful in the first place.
Microsoft uses its size to its advantage and avoids making it a weakness. It has increased spending to accelerate growth, but not to the point of waste. The company is still buying back a ton of stock and significantly increasing the dividend every year.
The company has several levers to create value for shareholders. The company does not rely entirely on new ideas and does not rely too heavily on its old products and services. It’s not an all-or-nothing growth stock that doesn’t pay dividends and dilutes shareholders.
Microsoft is even buying back more than enough stock to offset the stock-based compensation. As you can see in the following chart, the country has delivered consistent and significant increases in its dividend over the past decade and reduced its share count by 9.6%, despite the rapid expansion of its share-based compensation, which for the first time in surpassed $10 billion in the fiscal year. 2024.
MSFT stock outstanding chart
Perhaps most importantly, Microsoft has more cash, cash equivalents and marketable securities than debt on its balance sheet. It ended fiscal 2024 (ended June 30) with $18.32 billion in cash and cash equivalents, $57.23 billion in short-term investments such as marketable securities, and only $42.69 billion in long-term debt.
Too often, investors focus on the quantity of companies’ revenues and profits without determining whether those results are sustainable. There are countless examples of companies that have developed a hit product that has contributed to incredible results. But the product turns out to be a fad, demand drops, results plummet and the company can’t score another big idea.
Whether the product is surpassed by a better alternative: think Apple replaces BlackBerry, Netflix surpassing Blockbuster, or simply the shift to online sales that pushed companies like RadioShack out of business.
Microsoft may have the best position of any company worth over $1 trillion because it does so many different things so well: Microsoft Cloud, Windows, commercial and consumer products for the office, LinkedIn, Xbox content and services powered by Activation Blizzard, owned by Microsoft, server products, devices, enterprise services and more.
Here’s a look at Microsoft’s fiscal 2024 results by segment.
Segment revenue
Results 2024
Productivity and business processes
$77.73 billion
Intelligent cloud
$105.36 billion
Other personal computer use
$62.03 billion
Total turnover
$245.12 billion
SEGMENT OPERATING RESULT
Productivity and business processes
$40.54 billion
Intelligent cloud
$49.58 billion
Other personal computer use
$19.31 billion
Total operating income
$109.43 billion
BUSINESS MARGIN
44.6%
Data source: Microsoft.
Ten years ago, Microsoft earned $86.83 billion in revenue and $27.9 billion in operating income. So while sales have only increased 161.9% over the past decade, operating income has almost quadrupled. The Intelligent Cloud business alone is generating more revenue and nearly doubling operating income than the company as a whole recorded a decade ago.
Microsoft faces competition in all its segments, but the company is doing an excellent job developing new tools that can be used across the business. Copilot, and AI in general, are great examples of how it has deployed a similar solution across its segments and improved them all.
In short, it would take a lot to damage the structural integrity of Microsoft’s earnings profile. So while you might say the stock looks expensive at 37.1 times earnings, the quality of those earnings and the ability to grow earnings through multiple segments and share buybacks makes it a much better value than seems at first glance.
For these reasons, Microsoft stands out as the company with the best balance of risk and potential reward, valued at over $1 trillion.
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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Apple, Microsoft and Netflix. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
If I could only buy shares in one $1 trillion company until the end of 2025, I’d pick this excellent growth stock. originally published by The Motley Fool
