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A £10,000 investment in Microsoft (NASDAQ:MSFT) shares from February 2016 is now worth £72,815. That’s an outstanding result and it doesn’t even include the dividends.
Ten years ago, the stock was trading at an unusual discount because the company was in the early stages of a major technological transition. Sound familiar?
Cloud
Back in 2016, Microsoft shares were trading at some unusually low valuation multiples. The stock reached a price-to-earnings (P/E) ratio of 18 and a price-to-book (P/B) ratio of 5.
The reason is that the company was going through a major shift in the way it operated. It was shifting from selling physical copies of software (on discs) to cloud-based subscription services.
Moving from permanent licenses to monthly subscriptions resulted in a drop in sales. And building out the associated data centre infrastructure compressed margins in the short term.
On reflection, though, the chance to grab Microsoft shares at a once-in-a-decade valuation proved to be a huge opportunity. But this isn’t just a history lesson – it might well be relevant today.
AI
Fast forward to the present day and Microsoft’s stock has just fallen 16% in a month. The big reason is that the firm has announced plans for $150bn in artificial intelligence (AI) investments this year.
That’s going to weigh on free cash flows for the foreseeable future. But while history doesn’t exactly repeat itself, I wonder whether investors might think there’s something familiar here.
There’s a risk that Microsoft could be over-investing in AI at the moment. And a big part of this comes from the fact that 45% of the firm’s contracted future revenue is set to come from OpenAI.
It’s currently unclear exactly how Sam Altman’s firm plans to finance its obligations. So investing heavily on the basis of future order from ChatGPT’s owner makes investors nervous.
Risks
There isn’t much investors can do in these situations. The situation is in the hands of the company’s management – and Microsoft looks to me to have a very good CEO in Satya Nadella.
I’ve been impressed by the way Nadella has conducted himself over the last 12 months or so. He wasn’t flustered by DeepSeek and he has a clear strategy for the firm.
Most importantly, he doesn’t come across to me like someone running a start-up. His ambition isn’t growth at all costs – he seems to me to be a careful, diligent, and responsible operator.
I certainly don’t believe Microsoft is making a $150bn commitment without a lot of careful thought first. That’s not to say it can’t make a mistake, but I strongly doubt this is just data centre FOMO.
Opportunity
I think the recent pullback in Microsoft shares means it might be worth investors taking a closer look. The stock is down 2.7% over the last 12 months, but earnings per share have climbed 29%.
There’s no guarantee the share price won’t fall further from this point. But chances to buy the stock at these kinds of valuation multiples don’t come around very often.
