Currently, Microsoft (NASDAQ:MSFT) is the world’s most valuable company, with a market cap of $3.33 trillion. With a valuation like that, you may think that it’ll be difficult for the company to produce the level of growth necessary to drive the next needle-moving surge for Microsoft stock.
But while it may be a long time before shares in the software giant and generative AI first mover double or triple in price, don’t assume Microsoft has reached, or is fast approaching, a “topping out” moment. The potential for shares to generate more-than-satisfactory returns has yet to go away.
In fact, forget about MSFT’s membership in the “$3 trillion club.” In a few years time, this stock could end up becoming the “founding member” of the “$5 trillion club.”
Microsoft Stock: King of the Hill, Top of the Heap
There are currently seven stocks in the “trillion dollar club,” and besides MSFT, only Apple (NASDAQ:AAPL) has a market cap exceeding $3 trillion. Until this week, Nvidia (NASDAQ:NVDA) was in that club.
Not only that, just recently, the AI chip powerhouse briefly grabbed the market cap crown from Microsoft.
However, following NVDA’s latest sell-off, Microsoft stock is once again king of the hill, top of the heap, as Frank Sinatra might have put it. All bets are off whether MSFT maintains this top position.
Depending on investor reactions to developments like earnings and new product launches, AAPL or NVDA could surge to the number one spot.
Two other “Magnificent 7″ names, Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN), are arguably also within striking distance. However, for MSFT, its spot in the market cap pecking order isn’t what matters.
Rather, it’s whether the stock can deliver strong returns for those buying in at current prices. Despite Microsoft’s size, there’s still potential for the stock to keep climbing.
The Path to a New Market Cap Milestone
To reach a $5 trillion market cap, Microsoft stock needs to appreciate in value by around 50%. Yes, this may sound like a tall order. Investors are highly aware about the company’s recent success and future potential capitalizing on the generative AI growth trend.
Besides becoming more valuable, Microsoft has also become more expensive on a price-to-earnings basis. At current prices, MSFT has a forward P/E of 38. Still, while pricey, this rich valuation may be sustainable.
The impact of the AI trend on Microsoft’s enterprise software and cloud computing segments could keep growth at elevated levels.
This, in turn, could help the company sustain its rich valuation. If valuation stays constant, all that may be required for MSFT to hit a $5 trillion market cap is for earnings to rise 50% above present levels.
Although the highest estimates call for earnings growth in FY2025 of only around 20%, by FY2026 it may be achievable.
Why? Microsoft has another growth catalyst at play besides generative AI. As several sell-side analysts have recently pointed out, Microsoft’s cybersecurity segment could provide a serious boost to overall growth in the coming years.
Bottom Line: $5 Trillion or Not, Still a Buy for Steady Upside
More important than the fact that hitting a valuation of $5 trillion is within reach for MSFT, is the fact that, even if the stock cannot achieve this by the latter years of this decade, shares could still generate a worthwhile upside for investors buying in today.
Rising in tandem with expected earnings growth could lead to additional years of the stock accruing double-digit gains. Also, don’t forget that, while small, Microsoft’s 0.67% forward dividend yield, will provide an additional boost to total returns.
In short, whether as a wager of this AI software powerhouse becoming the first $5 trillion stock, or as a steady standby in a well-rounded portfolio, Microsoft stock is still a worthwhile buy at or near current price levels.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
