Microsoft Actions Excel in an area. But is it enough to buy the stock?

Microsoft (MSFT 1.07%) has been one of the most important tech names it has owned in the past five years. The stock has risen steadily with a few dips in between. Much of that growth is tied to one part of its business: Azure. Azure is Microsoft’s cloud computing wing and has consistently delivered quarter after quarter of growth in the high 20% range. If you’re a Microsoft investor, your case is focused on Azure growth.

However, the focus on Azure has driven Microsoft’s stock to an expensive valuation level. So is the stock worth buying today? Or has the easy money already been made?

Cloud computing is a massive trend that investors cannot ignore

Cloud computing is the practice of offloading a specific workload over the Internet to an offsite data center with significant computing power. By choosing to use cloud computing instead of traditional on-site computing, businesses can easily scale their usage and computing power. For example, customers looking to train an AI model can access thousands of Nvidia GPUs in an Azure data center. Then, once that training session is complete, it no longer rents the computing power.

This allows companies to avoid the huge upfront costs of building their own supercomputers. Plus, by allowing users to easily scale up or down, it avoids the inevitable realization that the car they bought is either too big or too small.

Cloud computing is expected to be a massive industry, and with a relatively small amount of work moving to the cloud, it’s only in the early stages of growth. In fact, Mordor Intelligence estimates that the current size of the cloud computing market is around $680 billion. However, it is expected to grow to $1.44 trillion by 2029. This is a huge market opportunity, and Microsoft has done quite well in expanding Azure’s reach. It currently ranks second in terms of market share.

But is it enough to buy the stock?

Microsoft is a solid business, but is the price you’re paying too high?

Unfortunately, Microsoft doesn’t disclose individual segments in its quarterly results, so we don’t know how much money Azure generates for the company. Instead, we are forced to use old information and broad assumptions.

In the fourth quarter of fiscal 2023 (ended June 30, 2023), management disclosed that Azure generated more than half of its intelligent cloud business segment revenue. A year later, Azure grew faster than all other components of this segment, so I’ll assume that Azure accounted for about 60% of total revenue. Using this estimate, Azure grew year-over-year revenue by 29% to about $17.1 billion.

That’s impressive growth for a division of its size, and given that it’s about 26% of the total business, it’s a big part of it. But with investors focused on Azure, are they missing something else?

Overall, Microsoft’s revenue rose 15% year over year to $64.7 billion. However, 3 percentage points of that growth came from the Activision Blizzard acquisition, which was completed earlier this year. Without that boost, Microsoft’s revenue rose 12% this quarter. That’s respectable growth, but does it warrant a significant premium for the stock?

Microsoft shares have fallen sharply since July as the tech big suffered a sharp sell-off. But at 31 times forward earnings, it’s still expensive from a historical perspective.

MSFT PE Ratio data (before) by YCharts

The stock is basically as expensive as it was when it entered 2024, but it’s still not cheap.

As Azure grows to become a larger part of the overall business, you may see Microsoft’s revenue increase. But its profits may decline. Using the cloud computing industry leader’s 36% operating margin Amazon Web services as the base case for Azure’s potential, that’s down from the 41% operating margin Microsoft posted company-wide.

Although this is only a modest decrease, the long-term difference is significant. This is something all Microsoft investors need to keep in mind.

But is the stock a buy here? With all the momentum against big tech, I think there will be much better buying opportunities going forward. I would like to own Microsoft stock in the future, but only at a fair price. And 31x forward earnings doesn’t mean it, so I’ll pass (for now).