Break out the birthday cake and candles, because today marks a major milestone for Wall Street’s premier software stock. On April 4, 1975, Microsoft(NASDAQ: MSFT) was founded in Albuquerque, NM, by former CEO Bill Gates and Paul Allen.
Although software stocks have taken it on the chin in recent months due to concerns about artificial intelligence (AI), shares of Microsoft have catapulted by nearly 624,000%, including dividend reinvestment, since their initial public offering in March 1986.
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Microsoft’s outsize returns over the last four decades reflect its ongoing aggressive investments in high-growth initiatives, along with the steady cash flow generated from its legacy segments.
Azure trails only Amazon Web Services in global cloud infrastructure services spend. The incorporation of AI solutions, including generative AI and large language model building and training capabilities, have reaccelerated Azure’s sales growth to nearly 40% on a constant-currency basis.
But it’s important not to overlook Microsoft’s legacy operations when accounting for its outperformance. Although Windows and Office aren’t the growth stories they were at the start of the 21st century, Windows remains the clear No. 1 desktop operating system worldwide. These are exceptionally high-margin operating segments that generate abundant cash flow, which Microsoft can reinvest in faster-growing initiatives.
Speaking of reinvestment, Microsoft ended 2025 with approximately $89.5 billion in cash, cash equivalents, and short-term investments, and has generated $80.8 billion in net cash from its operations through the first six months of fiscal 2026 (ended June 30, 2026). It generates so much cash from its operations that it’s able to pay out Wall Street’s largest nominal dividend, and has the luxury of making acquisitions to expand its reach.
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Despite Microsoft’s several competitive advantages, its shares have lost roughly a third of their value since hitting an all-time high in late October.
Most software stocks have been weighed down by the belief that AI will reduce demand for high-margin creative software solutions. Though there may be some truth to this fear years from now, businesses are still in the very early stages of optimizing AI solutions to maximize sales and profits. Microsoft’s sustained double-digit growth rate and reaccelerating Azure revenue suggest AI is not adversely impacting it.
The silver lining for long-term investors is that this AI panic for software stocks has created a handful of eye-popping price dislocations.
The six-month tumble in Microsoft stock has lowered its forward price-to-earnings (P/E) ratio to 19.4, marking a 34% discount to its average forward P/E over the trailing half-decade. Shares are also trading at roughly 7.3 times forecast fiscal 2027 sales, which would represent the lowest price-to-sales multiple for Microsoft since 2018.
Although a historically expensive stock market could lead to a bumpy ride for Microsoft and its peers over the next couple of quarters, all signs continue to point to its recent share price decline being a price dislocation worth pouncing on.
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