If I Could Buy Only 1 Stock, This Would Be It

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It’s easy to suggest individual stocks to a crowd of investors knowing those names will only make up part of their diversified portfolios. However, things change when an investor (including myself) is limited to just one pick. That single stock has to check off a lot of boxes, the most important of which are balancing reliability, longevity, and above-average growth. That’s a pretty tall order these days.

There are a few companies out there of this ilk though, and my favorite all-weather name among them is Microsoft (NASDAQ:MSFT).

Surprised? I get it. The company is seemingly dependent on just one highly competitive and often-cyclical technology business — software, and its Windows operating systems in particular. The stock’s also uncomfortably expensive right now, valued at more than 33 times this year’s projected profits and more than 29 times next year’s earnings estimates.. With a closer look though, you’ll find that Microsoft is so much more than just Windows, and that this stock easily justifies its premium price.

Several ways to make money, and they all work

Its roots may have been in software sales. But, don’t think for a minute this company hasn’t evolved into an organization relevant to all of today’s most important markets.

The graphic below tells the tale, depicting recently ended fiscal 2021’s results. No single business unit accounts for more than about one-third of Microsoft’s revenue or profits. Indeed, the company’s top and bottom lines are amazingly well distributed across all three of its key operating segments.

Data source: Microsoft. Chart by author.

And this image still doesn’t quite do the bullish thesis its full justice.

Within the Productivity and Business Processes arm you’ll find commercial and consumer office productivity software revenue — think “Office” software suites — as well as LinkedIn. The Intelligent Cloud unit not only offers products needed to power servers, but it also includes Azure software that allows cloud computing managers to interface with their hardware. More Personal Computing covers everything from the aforementioned Windows operating system to video gaming to laptops like the Surface. All told, Microsoft manages 14 distinctly different businesses. That gives the company plenty of opportunities to sell something to somebody at any given time, smoothing out any temporary headwinds faced by any one of its units.

And don’t look past the fact that Microsoft already enjoys a commanding control of the computer operating system market; GlobalStats’ statcounter indicates that Windows is installed on 76% of the world’s desktops and laptops. Already the centerpiece of most corporate and consumer computing environments, Microsoft is not only positioned as a gatekeeper, but a go-to app and software vendor. This positioning helps the company maintain its leading market share, as does the world’s familiarity with Windows itself.

Image source: Getty Images.

Bolstering the bullish agreement here is the less appreciated factoid that much of this revenue is the result of subscriptions to services like Xbox Game Pass, Office 365, and Azure.

While the company itself isn’t terribly forthcoming with the specifics, Microsoft confirmed during its most recent earnings call that its commercial (non-consumer) businesses are sitting on $141 billion worth of “remaining performance obligations,” up 32% year over year. That just means these clients have already agreed to purchase services, but the company can’t yet book that revenue since the service itself has yet to be delivered. For perspective, Microsoft did $168.1 billion worth of business during fiscal 2021.

Look for more growth from Microsoft

The end result of all these dynamics is a company that’s been growing reliably in a variety of ways for a variety of reasons. This isn’t the proverbial one-trick pony it was 25 years ago, when Windows was at the core of everything the company did and one-time sales of software were the norm.

As evidence of how brilliant this evolution has been, one only has to look at the company’s past and projected fiscals. The analyst community is calling for revenue growth of 14% this year and nearly 13% next year, matched by comparable per-share earnings growth for the two-year stretch… and why not? We’ve lived without the cloud, mobile computing, and high-performance video games before; but, now that the world has gotten used to having all of these tech-based offerings around, people aren’t apt to regress now.

Data source: Thomson Reuters. Chart by author.

Bottom line? The dots aren’t too terribly tough to connect. While Microsoft faces competition on all fronts, somehow it still seems to be operating with a wide moat that keeps those competitors in check.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.