Microsoft: Next Stop $600 or Has the Growth Stock Run Up Too Far, Too Fast?

Key Points

• Microsoft is knocking on the door of a $4 trillion market cap.

• The tech giant is thriving in the age of AI, which isn't the case for some software-as-a-service companies.

• Microsoft’s valuation is stretched, but the company is arguably the best it has ever been.

• 10 stocks we like better than Microsoft ›

Microsoft (NASDAQ: MSFT) is over $500 a share and up 19.1% year to date at the time of this writing -- handily outperforming the S&P 500's 6.8% gain.

Although Nvidia is capturing the spotlight as the first company to reach a $4 trillion market cap, Microsoft is right behind -- sporting a market cap of over $3.7 trillion.

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Here's what differentiates Microsoft from other investment opportunities, what it would have to do to justify a $600 share price, and some concerns that investors will want to monitor before diving headfirst into this growth stock.

Image source: Getty Images.

A recipe for long-term growth

Microsoft continues to be arguably the most balanced tech company on the market due to its diversified business model.

It's an industry leader in enterprise software through Microsoft 365, its business applications, the Windows operating system, developer tools like GitHub, gaming software, and more. It is also a cloud computing giant through the Microsoft Azure platform and its associated products and services. It also makes tech hardware like Surface devices, Xbox gaming consoles and accessories, and more.

Microsoft is integrating artificial intelligence (AI) across its business segments for both consumers (through Copilot AI assistants) and for enterprises (through tools like Azure OpenAI and Azure AI services).

Microsoft offers investors exposure to many different end markets under the umbrella of one company with an exceptional balance sheet, high margins, and stable cash flows.

A winner in an industry riddled with uncertainty

Possibly the simplest reason why Microsoft is doing so well and hovering around an all-time high is that its thriving in both the cloud infrastructure and application software niches in the age of AI.

This has been no easy task, as both cloud leader Amazon and third-place player Alphabet continue to aggressively invest in their cloud computing businesses -- challenging second-place Microsoft's efforts to hold and gain market share. Smaller players like Oracle and International Business Machines are also successfully building out their cloud offerings.

Investors were initially excited about the potential for enterprise software to capitalize on AI through new tools and agents that would save users time by helping them create and accomplish tasks. However, many software stocks have pulled back considerably as that optimism has moderated.

Salesforce, for example, is down 21% year to date after hitting an all-time high in December. Adobe is down more than 16% this year and a staggering 46% from its peak.

There are a lot of question marks as to which companies will thrive in the age of agentic AI -- tools that can do a variety of tasks independently once asked, rather than simply responding to prompts. Many software-as-a-service (SaaS) companies rely on selling subscriptions and seat licenses to users and organizations. But if AI agents can take on some of those tasks, that could directly impact the profitability of a company like Salesforce or Adobe. For the first time in years, the moats of some of these large enterprise software companies look penetrable. That could be especially significant if an agent can do the work that would have required an employee or individual to have several different SaaS subscriptions.

Microsoft isn't immune to the threat of agentic AI, but it is in an advantageous position relative to other software companies because of the everyday use and simplicity of many of the Microsoft 365 apps and the crossover between the Windows operating system and AI tools like Copilot across applications. Similarly, Azure AI is integrated into the Azure ecosystem. For GitHub, Microsoft has introduced "agentic DevOps," which allows AI agents to collaborate with users to develop software faster.

In sum, Microsoft's business model and existing solutions are evolving, not remaining stagnant. Its ability to adapt, paired with the strength of its other segments, is why Microsoft is doing well while many other enterprise software companies are under pressure.

Microsoft commands a premium valuation

Microsoft shareholders shouldn't get complacent just because the stock has been red-hot. The company will need to demonstrate that users are consistently willing to pay for its AI tools and that it can sustain its high margins and decent growth rates.

Lately, Microsoft's stock price growth has been outpacing its earnings growth as investors are willing to pay a higher price for the stock today because they are optimistic about its growth potential. As a result, Microsoft's valuation metrics are relatively high compared to their historical averages. In fact, its forward price-to-earnings (P/E) ratio is nearly identical to its 10-year median P/E. Meaning investors are essentially willing to pay a year's worth of premium for Microsoft stock today -- trusting that the company can grow into its valuation over time.

MSFT PE Ratio data by YCharts.

Also note Microsoft's elevated price to free cash flow (FCF).

Microsoft is a cash cow, but it is spending so much on research and development that its capital expenditures are spiking -- cutting into FCF. That strategy could pay off if Microsoft's AI investments accelerate its earnings growth. But for now, the stock is definitely on the expensive side, which is something investors should be aware of before buying.

The best way to approach Microsoft stock

In the stock market, anything can happen in the short term. So Microsoft could get to $600 a share on euphoria alone.

But for Microsoft to reach $600 a share, stay above that level, and continue growing, the company must convert its capex into earnings growth. Or more specifically, it must hold or grow its market share in cloud infrastructure, continue developing useful AI tools, and spearhead agentic AI. Otherwise, investors may start to question whether its high capex is worthwhile or borderline wasteful.

It's also worth mentioning that Microsoft isn't just throwing all of its dry powder on AI and hoping for a boom. The company has allocated a considerable amount of capital toward stock buybacks and dividends while maintaining a balance sheet with far more cash, cash equivalents, and short-term investments than long-term debt. In other words, Microsoft isn't betting the farm on its AI investments -- but it is executing a more aggressive capital allocation strategy than it has in years past.

Overall, Microsoft remains a solid, foundational growth stock that investors can build a portfolio around. It would be easy to look at the run-up Microsoft has in its rear-view mirror and say the stock is overvalued. Or to say that the stock won't be worth buying until the company can bridge the gap between expectations and results. But selling shares of an excellent business just because its valuation is on the pricey side is usually a bad idea.

Rather, a better approach is to let your winners run and allow them to grow into their valuations over time. I think that's a good approach to investing in Microsoft right now. The stock isn't cheap, but it arguably doesn't deserve to be, given that the company is firing on all cylinders. So, while Microsoft has certainly run up far and fast, its shares could still be worth buying for patient long-term investors.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Daniel Foelber has positions in Adobe and Nvidia. The Motley Fool has positions in and recommends Adobe, Alphabet, Amazon, International Business Machines, Microsoft, Nvidia, Oracle, and Salesforce. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.