The personal computer revolution was made possible through the contributions and innovations of several tech companies. Microsoft is one of these companies. Its Windows operating system was responsible for the further expansion of the PC market and the wider mass market adaptation of personal computers. This company has evolved further. It has made significant contributions to software development, network systems, and the different facets of the consumer electronics industry. It remains one of the largest and most reputable companies in the world and has also remained a dominant force in the entire tech sector alongside notable American tech companies such as Alphabet, Apple, Amazon, and Meta. This article discusses the pros and cons or advantages and disadvantages of investing in Microsoft stock.
Should You Buy Microsoft Stock: A Look at the Pros and Cons
Pros: Advantages of Microsoft Stock
Microsoft has expanded its business interest beyond Windows. It has succeeded in developing and marketing notable brands that became household names such as Microsoft 365, which include several productivity software applications, and the Xbox, which has become one of the most popular video game consoles in the market.
The company also has business-to-business products and enterprise solutions. It has been developing technologies for network systems to include the Azure cloud computing platform and the business and enterprise versions of Microsoft 365. The Microsoft Products and Services Agreement is a transactional licensing agreement that consolidates the purchase of different products for commercial, government, and academic organizations.
Microsoft also owns and operates the Bing search engine platform and designs and markets the Microsoft Surface brand of hybrid laptops. It has made significant investments and developments in artificial intelligence applications similar to other tech companies. Nevertheless, considering its diverse business interest, below are the advantages of Microsoft stock:
• Most Valuable Stock in the World: Microsoft is a large-cap stock with a market cap of more than $2 trillion. It is one of the most valuable companies in the world. There are advantages to buying and holding large-cap stocks over mid-cap stocks and small-cap stocks. These include better assurance of stability, proven business leadership, strong corporate governance, and lower liquidity risk.
• Value and Growth Characteristics: It also has some of the characteristics of a value stock and a growth stock. Its historical intrinsic value has been higher than its current value but it also has a high potential for further growth due to its continuous innovative pursuits aligned with trends and the direction of the tech sector. Investing in Microsoft is aligned with some of the principles of value investing and growth investing.
• Repurchase and Dividends Payouts: The company provides an option for its stock investors to receive cash through stock repurchase plans. It also offers common stock and preferred stock. Its preferred stock has a history of consistent dividend payouts while its common stock can also be considered a dividend-paying stock because it generates payouts during periods of favorable financial performance.
• Diversified Business Interests: Another advantage of Microsoft stock is that investing in it means investing in its diverse businesses and products. The company has an established influence in the PC market and within the specific software market segment but it also has a presence in the video gaming and consumer electronics markets. It also has a competitive position in the cloud computing market.
• Expansion Through Growth Strategy: The company is committed to expanding its business through a growth strategy that revolves around the expansion of its cloud computing business and the development and deployment of practical applications of artificial intelligence. These two business segments have been pursued by other notable tech companies such as Amazon, Alibaba, OpenAI, and Nvidia.
• Remarkable Business Leadership: Investing in Microsoft stock also means investing in its people. The company has been known for its strong management and leadership that have enabled it to grow its business while also exploring newer technologies and introducing novel innovations. It also has strong corporate governance marked by sustainability, value-creation, transparency, and solid financials
Cons: Disadvantages of Microsoft Stock
Microsoft is an incumbent in the tech sector and the more specific PC market. However, considering the existence of other tech companies, the dominance of its Windows operating system faces threat. Apple is its biggest competitor in the PC market while the entire market is also threatened by the growing capabilities of mobile devices.
It also struggles to become a dominant player in certain markets. For example, in the cloud computing market, Amazon Web Services remains the dominant player while companies such as Google Cloud Platform, IBM Cloud, and Alibaba are threatening the spot of Microsoft Azure. Sony dominates the video game console market with its PlayStation.
The pace at which technological developments advance further also compels tech companies like Microsoft to determine or discover innovations to remain relevant. Doing so requires significant investments in research and development. Nevertheless, considering these issues, the following are the specific disadvantages of Microsoft stock:
• More Expensive than Other Stocks: One of the main disadvantages of Microsoft stock is its stock price. It is about twice to thrice as expensive as other large-cap tech companies such as Alphabet, Amazon, and Apple. This high price tag means that it is not accessible to other investors with a limited budget for diversified stock investing and those who prefer more affordable stocks from prominent tech companies.
• Impacts of Competitive Forces: Remember that Apple, Amazon, and Sony are the biggest competitors of Microsoft in the respective PC, cloud computing, and video game console markets. The presence of these companies raises the bargaining power of the consumers and suppliers. Its software products are also threatened by substitutes for personal computers such as smartphones and tablet computers.
• Dependence on the PC Market: The company has a diversified business interest. However, considering its revenue streams, the fact remains that it remains dependent on the PC market. It has made significant accomplishments in its cloud computing business but the existence of capable competitors means that it needs to improve the market shares of its other business segments and their respective products.
• Exposure to Macroeconomic Risks: Another disadvantage of Microsoft stock is its exposure to several macroeconomic risks. Its business model may not be heavily tied to the economic cycle unlike cyclical stocks but macroeconomic factors can affect its performance and earnings. Examples include changes in interest rates, inflation, foreign exchange fluctuations, and geopolitical risks.
