If you've been an investor for any meaningful length of time then you've almost certainly heard the phrase "past performance is no guarantee of future results." It's a simple but powerful warning rooted in the fact that circumstances -- all of them -- are forever changing.
However, sometimes an incredible performance from a particular stock can be followed up with an equally incredible return in a similar time frame. Take software giant Microsoft (MSFT -0.78%) as an example. While the stock's massive gain since its 1986 public offering has made lots of millionaires, the software giant's foreseeable future is just as bright as its past. It's just going to look a little different.
Running into saturation, competitive headwinds
More than 70% of the planet's personal computers utilize Microsoft's Windows operating system, which is actually down from the PC industry's early days; most people's first experience with any computer was made possible with Windows. And, although its hold on the office productivity software market isn't quite as strong as it was in the early days of personal computers, Microsoft 365 (formerly Microsoft Office, which includes Excel, Outlook, and Word) is still the preferred productivity solution for plenty of people. These two technological anchors are responsible for most of Microsoft stock's near-400,000% gain since its IPO.
Then there's the Microsoft you may not know. This company is also the parent to the professional networking website LinkedIn, the originator of the Xbox video game console, the developer of the Azure cloud computing platform, and the owner of search engine Bing. Never even mind the wide range of specialty services -- like workflow automation and visualization. It offers services to businesses of all shapes and sizes.
The PC and business technology market has changed, of course. Namely, it's highly saturated. The U.S. Census Bureau reports computers are now found in more than 9 out of 10 U.S. homes, while similar statistics apply to other developed nations. This doesn't leave much room for immediate growth. The video gaming industry is relatively stagnant as well, for the same reason. There's also no denying Bing is no near-term threat to Google's dominance of the search engine market.
The one Microsoft market that's seeing significant growth? Cloud computing. But even then investors may want to keep their expectations in check. Data from Synergy Research Group indicates that even though Microsoft's Azure is still picking up new customers, it's losing market share to Alphabet.
Data source: Synergy Research Group. Chart by author.
So what, pray tell, is going to maintain Microsoft's status as a millionaire-maker stock? It's the evolution of how it monetizes its tech paired with the world's insatiable -- and still growing -- demand for its solutions. Crazy-high profit margins bolster the bullish case, in that they provide fiscal flexibility most other companies can only envy.
Adapting as needed
The Microsoft of today isn't the Microsoft of yesteryear. In its early days, its Windows operating system as well as Microsoft Office were offered as a stand-alone, one-time purchase. If you wanted an upgrade, you had to pay for it. And for years, the model worked fine.
As was already noted above though, circumstances are forever changing. Microsoft has adapted to change in a way that ultimately sets the stage for even more reliable revenue. For instance, now more often than not the company's software is rented rather than outright purchased, driving recurring revenue.
At least give partial credit to how Microsoft has leveraged its Windows operating system. What used to be a profit center in and of itself is now freely given away (upgrades to Windows 10 and Windows 11 have been available to users of Windows 7 and Windows 8 at no cost since their debut). Why? Because the Windows platform has evolved into a means to a bigger end. Bringing more and more users into the Windows digital ecosystem for free is ultimately more lucrative than selling a single copy of Windows to them. It also prevents competitors' ecosystems from ever fully taking root.
Arguably more than anything though, the evolution of Microsoft's business model is leading to wider profit margins. After turning the proverbial corner of this new model in 2016, gross margin, earnings before interest, taxes, depreciation, and amortization (EBITDA) rates, and operating margin have steadily tiptoed their way to multiyear highs.
MSFT Operating Margin (TTM) data by YCharts
And this isn't insignificant. Not only are margins improving, but they're also improving in step with rising revenue. As a result, actual net profits are growing markedly faster than sales are.
MSFT Revenue (TTM) data by YCharts
Obviously, greater profitability is good; it provides more options. Microsoft isn't simply stacking up cash in a bank account, however. It's also directly building shareholder value with part of its new windfall profits. For example, aside from its modest dividend, the company's repurchased more than 1.5 billion shares since 2016, bolstering its per-share profits to the tune of 17% during this time frame. Look for more of the same for the indefinite future.
The new Microsoft is just as compelling as the original
The thing is, all of these actions and efforts are sustainable; they'll likely be sustained for the next 40 years. The world's become too reliant on computers and the internet to simply stop using either now. Indeed, with the advent of artificial intelligence now making it possible to use technology to create new technologies, it's not inconceivable that we'll become even more dependent on solutions like the ones Microsoft brings to the table.
So, yes, this magnificent stock could continue making more millionaires. It's just going to do it differently in the future than it did in the past. For the better part of its past, Microsoft was a revenue growth machine. Going forward, it's going to turn the growing demand for consumer-friendly technology into mountains of cash. You'll want to own the latter version just as much as you would have wanted to own the original.
