At a 6-Month Low, Here’s My Top Dow Jones Stock to Buy Now

The following chart shows how Microsoft’s accelerated sales growth in recent years has also come with higher margins, a testament to the profitability of AI investments.

However, there are concerns that Microsoft’s AI spending may be overextended.

This fiscal year, management plans to spend $80 billion on AI and cloud-based applications. The massive investment could impact near-term profitability.

Analysts’ consensus estimate calls for $13.16 in fiscal 2025 earnings per share (EPS) and $15.07 in fiscal 2026 EPS. For context, Microsoft reported $11.80 in diluted EPS in fiscal 2024, a 20% increase compared to fiscal 2023, whereas the fiscal 2025 target implies just 11.2% growth. So at least in the near term, earnings growth is decelerating. And margins could also decrease if AI spending doesn’t immediately translate to measurable results.

Anytime a company bets big on an idea, it puts pressure on those investments to pay off. But there’s also the risk of being too idle and falling behind in the AI race.

Therefore, the two biggest questions investors should ask are whether the company can afford to spend this much on AI without hurting its financial health, and if the investment dollars are going toward worthwhile endeavors.

In terms of financial health, Microsoft is as good as it gets. The company ended calendar year 2024 with $71.56 billion in cash, cash equivalents, and short-term investments and just $39.72 billion in long-term debt. In fiscal 2024, which ended June 30, 2024, it repurchased $17.25 billion in stock and paid $21.77 billion in dividends. While the dividend payment was higher, the buybacks were around $5 billion less than in fiscal 2023.

Management could continue pulling back on stock repurchases to fund its AI investments without taking on more debt. However, buybacks have helped offset Microsoft’s stock-based compensation expense and reduce its share count over time, accelerating EPS growth. Fewer buybacks would put pressure on the core business to drive earnings growth.

In sum, Microsoft can afford to spend more on AI.

As for the second million-dollar question, there’s reason to believe the AI investments are worth it. Microsoft is currently the No. 2 cloud player, ahead of Alphabet‘s Google Cloud but behind Amazon Web Services.

As demand for cloud computing grows to support AI workflows, Microsoft wants to ensure it is well positioned to take market share by providing advanced data centers and the best AI services. If it doesn’t take market share, its investments could still pay off as long as the overall cloud computing pie grows.

As a legacy tech company, Microsoft hasn’t been transformed by AI in the same way as smaller, faster-growing companies like Palantir Technologies or more pure-play AI names like Nvidia have. But it has been a net positive for the company. And Microsoft has the financial health and deep pockets necessary to pour money into building out AI infrastructure.

The languishing stock price and steady earnings growth have pushed Microsoft’s price-to-earnings ratio (P/E) to its lowest level in a year. In fact, its P/E is currently 33, which is right around its average over the last three to 10 years. But it is arguably a much higher quality business with better growth prospects today than in years past, making its valuation even more compelling.

As mentioned, management spends a ton on dividends every year. The company has increased its payout every year for nearly two decades, and although the stock yields just 0.8%, Microsoft’s growing dividend provides an added incentive to buy and hold the stock.

With a diversified business model, an affordable AI budget, and a reasonable valuation, Microsoft checks all the boxes for a foundational growth stock to buy now and build a portfolio around.

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*Stock Advisor returns as of February 21, 2025

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. 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 no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, Microsoft, Nvidia, and Palantir Technologies. 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.

At a 6-Month Low, Here’s My Top Dow Jones Stock to Buy Now was originally published by The Motley Fool