'Magnificent Seven' investing playbook: Microsoft is an aircraft carrier 'at its apex,' analyst says

Now that summer’s coming to an end, that means it’s time to pull out your scarves, grab a pumpkin spice latte, and reassess your tech stocks. This series helps you decide what to do with your shares of the biggest names in tech — Apple, Alphabet, Amazon, Microsoft, Meta, Nvidia, and Tesla — known as the Magnificent Seven. Up next is Microsoft, a leader in artificial intelligence.

Microsoft (MSFT) is even bigger than you probably think, and it's gaining momentum.

"This is the year for Microsoft where the aircraft carrier is at its apex, where acceleration starts happening based on changes from some time ago," D.A. Davidson analyst Gil Luria told Yahoo Finance.

Aircraft carriers aren't built overnight. According to Luria, the shift for the tech behemoth now worth over $2.4 trillion began when Satya Nadella took over as CEO in 2014.

"Microsoft was coming off 15 years of stagnant growth, when the business grew but the stock did not," Luria said. "They'd missed the shift to mobile, and at the time they had been far behind on the shift to cloud. Then, Satya Nadella took over."

Microsoft CEO Satya Nadella listens to a question as he sits in front of the Windows logo during the annual Microsoft Corp. shareholders meeting, Wednesday, Nov. 28, 2018, in Bellevue, Wash. (Ted S. Warren/AP Photo) (ASSOCIATED PRESS)

Right away, Nadella sought to make Microsoft less insular.

"He made it into a company that was far better integrated into the soft software technology ecosystem," Luria explained. "The second change he made was to become far more developer friendly, using a more open source approach ... and [making] the business approach more developer friendly."

Today, Microsoft is everywhere and embedded in our digital lives through cybersecurity, enterprise software, and its cloud business. These days it's even making inroads in search, thanks to the company's leadership in AI.

"The next big disruptive wave is AI, and Nadella recognized that early, which is why they invested in Open AI more than two years ago," Luria said, adding, "Not only did they invest in OpenAI, they put the wheels in motion to adapt their business to AI."

That's not to say there are no chinks in the armor. This year, Microsoft has been in the crosshairs of a number of cybersecurity failures, including one involving the State Department, which its competitor CrowdStrike was quick to point out.

"These continued developments reveal some of the systemic risks that Microsoft poses to consumers, businesses, and national security as a whole," CrowdStrike chief security officer Shawn Henry told Yahoo Finance. "We should all have higher expectations, and stakeholders across the security ecosystem should work together to restore faith in the security of critical systems.”

The nature of tech itself is also a risk for Microsoft. AI and its disruption could eventually facilitate a decline for Microsoft if it turns out that the giant aircraft carrier can't move fast enough or is headed off course.

"Anytime there's a big disruptive technology, it opens the door for new competitors and new businesses that build their business based on the new technology, and we're at that point in time," Luria said. "That's the biggest risk to all these bigger companies — but specifically for Microsoft."

So what should you do with Microsoft stock?

Still, as it stands today, Microsoft's AI-powered future looks bright. Currently, Wall Street analysts' recommendations for Microsoft break down to 54 Buys, six Holds, and one Sell.

On Wednesday, Microsoft also announced it will increase its quarterly dividend to $0.75 per share, a 10% increase over the previous quarter’s dividend.

The stock is up 37% year to date, which is unsurprising given the AI-fueled tech rally this year.

"Microsoft has built a formidable position in this generational transition that is AI," Tola Capital partner Aaron Fleishman, who previously worked at Microsoft, told Yahoo Finance. "The early partnership with OpenAI was a stroke of genius that will pay dividends for years to come. Microsoft’s ability to monetize both downstack through Azure consumption as well as upstack through the application layer with Office and other products positions the company particularly well to be a leader in AI for a long time."

Investors could take a pause on valuation, but the stock isn't in "runaway" territory just yet.

"Microsoft's on the higher end of its valuation range, but it's not that high," Luria said. "It traded up to 35 times earnings just a couple of years ago, and now we're closer to 29 or 30 times."

According to Luria, if you're looking at Microsoft, consider these three things: Watch how it's integrating generative AI tools into products, whether (and how) AI is driving cloud growth, and where competition is emerging — and whether Microsoft seems equipped to handle it.

If it can get all those engines roaring, that giant Microsoft aircraft carrier can go into hyperspace.

Allie Garfinkle is a Senior Tech Reporter at Yahoo Finance. Follow her on Twitter at @agarfinks and on LinkedIn.

Click here for the latest stock market news and in-depth analysis, including events that move stocks

Read the latest financial and business news from Yahoo Finance