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Microsoft MSFT may very well be one of those stocks to buy and hold forever. Known for its Windows operating system and Office productivity suite, Microsoft continues to widen its economic moat with a broad portfolio that now spans productivity and business processes, intelligent cloud, and personal computing. Today, its moat has not just one but three sources (cost advantage, network effect, and switching costs), which is more than many wide-moat companies can say. Management has done an outstanding job of allocating capital, and we have confidence in CEO Satya Nadella’s strategic vision to carry Microsoft forward. The best news for investors: The stock is a buy, trading 21% below our $490 fair value estimate. Microsoft appears on Morningstar analysts’ list of 33 Undervalued Stocks to Buy this quarter. It’s also among Morningstar chief US market strategist Dave Sekera’s 4 Core Stocks to Buy and Hold During Tariff Turbulence.
Microsoft is now a more focused company that offers impressive revenue growth with high and expanding margins and deepening ties with customers. We believe that Azure is the centerpiece of the new Microsoft. Even though we estimate it is already an approximately $75 billion business, it grew at an impressive 30% rate in fiscal 2024. Microsoft is also shifting its traditional on-premises products to become cloud-based solutions. Critical applications include LinkedIn, Office 365, Dynamics 365, and the Power Platform, with these moves now beyond the halfway point and no longer a financial drag. The company is pushing its gaming business increasingly toward recurring revenue and residing in the cloud as well. Thanks to its investment in OpenAI, Microsoft has also emerged as a leader in artificial intelligence.
Key Morningstar Metrics for Microsoft
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Economic Moat Rating
For Microsoft overall, we assign a wide economic moat, arising primarily from switching costs, with network effects and cost advantages as secondary moat sources. We believe the productivity and business processes segment and intelligent cloud segment have earned wide moats, and the more personal computing unit warrants a narrow moat. We believe Microsoft is likely to earn returns in excess of its cost of capital over the next 20 years. The more critical the function and the more touch points across an organization a software vendor has, the higher the switching costs. There is also the direct time and expense of implementing a new software package for the customer while maintaining the existing platform and retraining employees on a new system. Additionally, there is operational risk in changing software vendors.
Read more about Microsoft’s moat rating.
Fair Value Estimate for Microsoft Stock
Our $490 fair value estimate implies a fiscal 2025 enterprise value/sales multiple of 13 times and an adjusted price/earnings multiple of 38 times. We model a five-year revenue compound annual growth rate of approximately 13% including the Activision acquisition. We envision stronger revenue growth ahead as Microsoft had been bogged down by the 2008 downturn, the disposal of the Nokia handset business, and the onset of the model transition to subscriptions. However, we believe macro and currency factors will pressure revenue in the near term. We model operating margin increasing from 45% in fiscal 2024 to 46% in fiscal 2029, driven by improvements in gross margin as Azure continues to scale as well as some operating leverage. We expect some interim pressure on gross and operating margin in fiscal 2025 from an accounting change, Activision pressure, and investment in Azure capacity.
Read more about Microsoft’s fair value estimate.
Risk and Uncertainty
Microsoft’s high market share in client-server architecture over the last 30 years means that significant high-margin revenue is at risk. The company must continue to drive revenue growth of cloud-based products faster than revenue declines in on-premises products. Microsoft is acquisitive, and while many small deals fly under the radar, it has had several high-profile flops, including Nokia and aQuantive. The public cloud buildout is in its early phases. Amazon Web Services has taken the market by storm, with Azure trailing. In this rapidly evolving market, Microsoft must continually adjust its offerings and compete with a company that has built a business around aggressive pricing.
Read more about Microsoft’s risk and uncertainty.
Microsoft Bulls Say
Public cloud is widely considered to be the future of enterprise computing. Azure is a leading service that benefits from the evolution first to hybrid environments and then to public cloud environments.Microsoft 365 benefits from upselling into higher-priced products as customers are willing to pay up for better security and Teams Phone; this should continue over the next several years.Microsoft has monopoly-like positions in various areas (Windows, Office) that serve as cash cows to help drive Azure growth.
Microsoft Bears Say
The ongoing shift to subscriptions in slowing, particularly in Office, which is generally considered a mature product.Microsoft lacks a meaningful mobile presence.Microsoft is not the top player in its key sources of growth, notably Azure and Dynamics 365.
This article was compiled by Susan Dziubinski and Sylvia Hauser. Data as of April 16, 2025.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
