How to Buy Microsoft for the Cost of a Penny Stock
When the stock market is down to the extent that it has been for nearly a year now, it tends to spark a flight to quality. This means that investors, having been burned by speculative growth stocks and other highfliers, are retreating to the tried and true — companies that are stable, established, and attractively valued based on earnings expectations.
However, many of these quality companies have prohibitively high share prices, given their long histories of earnings growth. For some investors, it may not even be feasible to buy a single share. One such blue chip name is technology giant Microsoft (NASDAQ: MSFT), the third-largest company in the world with a market cap of roughly $2 trillion. However, there is an easy way to invest in Microsoft for the cost of a penny stock.
A 24% annual return over the past 10 years
Microsoft has been one of the top-performing stocks since it went public in 1986 at $21 per share. Since then, it has posted an average annualized return of 24%, and that’s including multiple stock splits, the last coming in 2003. It has been remarkably consistent, as its average annualized return over the last 10 years as of Aug. 29 is also 24%. It is currently trading at $268 per share, down 20% year to date (YTD).
For such a mammoth company, that type of growth is not easy to achieve over such a long period, but Microsoft has been able to adapt over the years. Its intelligent cloud business has been the growth driver in recent years. In the most recent earnings report, Microsoft had overall revenue growth of 12% year over year (YOY) and a 2% increase in net income. But most of the revenue growth came in the cloud computing business, with revenue up 28% YOY.
More specifically, the intelligent cloud segment saw revenue climb 20% YOY and is expected to see even greater growth — 25% to 27% YOY — in the first fiscal quarter of 2023, as my colleague Keithen Drury recently pointed out. And its Azure cloud computing segment saw a 40% increase in revenue in the most recent quarter, growing faster than the similar businesses of its two main competitors, Amazon (NASDAQ: AMZN) and Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL). As Microsoft continues to gain market share in this space, it should remain a long-term force, particularly as we emerge from this period of economic and market uncertainty.
Stock “slices” provide greater access
The $268 price tag might be a bit steep for some investors who want to gain access to Microsoft, but there are less expensive options. You could invest in a large-cap growth or technology-focused exchange-traded fund, or ETF, which would include Microsoft as one of its largest holdings, given that most are weighted by market cap.
Or you could invest in fractional shares of the stock, which are also called stock “slices” by some brokerages. Fractional shares, which most brokerages offer, allow you to invest by dollar amount as opposed to by share. So if you had $100 to invest, you could invest it in the fraction of the stock that that amount represents. In the case of Microsoft, $100 would buy you about 37% of a single share. But that $100 would grow at the same rate as a full share, so if the stock gains 24% over the next year — a growth rate it has achieved over the past 10 years — you would gain 24% on that $100. If you contributed $50 per month to it, you’d soon have a share and then some.
That said, don’t assume Microsoft can keep making 24% per year in the future. Future returns could be more or less than that, depending on how its business performs and what investors think of the stock.
Fractional-share investing is a great way to buy quality companies — particularly those some investors may have deemed too expensive — without having to pay up for an entire share.
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John Mackey, 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. Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Amazon, and Microsoft. The Motley Fool has a disclosure policy.