It’s likely that no other company has done what Microsoft (NASDAQ:MSFT) has of late. To be sure, there is only one other stock that has done what Microsoft stock has done: reach a market capitalization over $1.4 trillion.

That company, of course, is Apple (NASDAQ:AAPL). But the Apple story is different.

Its historic rally has come from a point when the stock actually was cheap by fundamental standards. After a plunge in early 2019, its shares traded at just 12-13x forward earnings expectations.

Microsoft stock did see a sharp decline in late 2018 during the last broad market correction. But even at December 2018 lows, investors still were paying a healthy multiple for the stock. MSFT didn’t have a core bearish argument as Apple did, as investors fretted about “commoditization” and pressure on sales in China.

The argument over Microsoft stock largely came down to valuation — and the bulls won. Incredibly, at highs reached earlier this month, the stock doubled in less than 14 months. For a company that was already worth almost $700 billion at the lows, that’s an incredible accomplishment. If it weren’t for the even faster rally in Apple, it would be unprecedented — even mind-boggling.

Back near the highs, the argument over the stock again comes down to valuation. And in that context, it’s worth noting what truly is unprecedented about Microsoft.

Microsoft Runs With the Growth Giants

Microsoft reported its fiscal second-quarter earnings on Jan. 29, which handily beat analyst estimates. The beat wasn’t much of a surprise. Microsoft revenue and earnings have topped Wall Street consensus almost without exception for over four years now.

But investors should take a step back from the expectations game and consider just how extraordinary the report was. This is the second-most valuable company in the world. It’s a mature business. And it grew revenue 14% year over year, and adjusted net income by 36%.

That type of growth from that type of business simply doesn’t happen. Increases of 36% in net income are what small- and mid-cap growth stocks provide in good quarters.

And even among the market’s most valuable companies, Microsoft’s numbers look impressive:

• Apple drove 9% revenue growth and 11% net income growth in its fiscal first quarter — but benefited from an easy comparison. Remember, it was slashed guidance for last year’s first quarter that led AAPL stock to plunge in early 2019.
• Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) increased revenue 17%. Operating income climbed just 13% against a 35% jump for Microsoft. (Alphabet’s net income did grow 19%, but that metric is affected by a series of accounting factors.)
• Facebook (NASDAQ:FB) drove faster revenue growth, with its top-line rising 25%, but it’s obviously a much younger company than Microsoft. Operating earnings rose only 13%, which badly lags the growth rate at Microsoft.
• Sales at Amazon (NASDAQ:AMZN) rose 21% in a blowout quarter. Operating income gained 2.4%, thanks to costs from one-day shipping.
• Alibaba (NYSE:BABA), purely from a growth perspective, did top Microsoft, with revenue up 38% and Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) up 37%.

Earnings Are Astounding

To be sure, some of those companies grew revenue or profits at a faster rate than Microsoft. But they should be growing faster. They are younger companies that are earlier in their development.

Indeed, Microsoft was dominating the software industry before most of those companies (save Apple) even existed. And they are the best, most valuable companies in the entire market.

It’s possible that a company like General Motors (NYSE:GM) or General Electric (NYSE:GE) posted similar growth in a single quarter when they were the market’s most valuable company (or second-most) decades ago. But it’s likely that kind of growth would have come after the Great Depression or during the postwar period, thanks to either an easy comparison and/or external factors.

Whether the specific numbers Microsoft posted in Q2 have been reached or not isn’t necessarily the point. Rather, the point, again, is to step back.

A mature, dominant company just grew profits 36% year over year. And while it is just one quarter, analyst estimates (which have a strong probability of being raised again) suggest a full-year increase in earnings per share just shy of 20%.

Companies don’t drive 20% earnings growth in their 45th year in a normal environment. Cyclical names might post those numbers in the recovery from a recession: Exxon Mobil (NYSE:XOM), for instance, grew profit over 50% in 2010, when it was the world’s most valuable company. (Incredibly, its market capitalization is now less than 20% that of Microsoft or Apple, a little over eight years after Apple passed Exxon for good.)

This is not a cyclical company. There has been no recession. Microsoft doesn’t have some soft earnings comparison in fiscal 2020: in fact, adjusted net income rose 22% in fiscal 2019. This is just a massive company driving essentially unprecedented growth.

Is Microsoft Stock Too Expensive?

The one concern is that the valuation assigned Microsoft stock, too, seems unprecedented. Shares now trade at over 32x the consensus EPS estimate for fiscal 2020 (ending June). The figure is still right at 30x, even backing out the net cash on the balance sheet.

45-year-old companies don’t grow like Microsoft in normal conditions; they also don’t receive price-to-earnings multiples of 30x in normal conditions.

And so there are valuation concerns, one reason I argued ahead of earnings that the gains in Microsoft would slow, if remain nicely positive. That was half-right: Microsoft stock already has risen 17% in 2020.

But as I wrote before, this market valuation alone has not been a reason to sell. Now, the biggest risk to Microsoft stock seems to be a decline in the market as a whole — as seen in the fourth quarter of 2018.

Investors are not going to decide that the stock is too expensive without making similar calculations for the rest of the market.

If investors are going to own U.S. equities, then, Microsoft stock still seems like a strong pick. Yes, the valuation is high. So is the earnings growth. But it’s that unprecedented growth that drives the unprecedented valuation.

As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.