Bill Gates Unloaded More Microsoft Shares in Q3. Is It a Buy, Sell, or Hold?

The rapid adoption of artificial intelligence (AI) has been great for Microsoft (NASDAQ: MSFT). The stock is up 72% since 2022, but that might have some investors wondering if it's still a good investment. After all, the stock's price-to-earnings (P/E) ratio is currently sitting at 34, which is toward the high end of its 10-year range and higher than the S&P 500's P/E of 30.

Co-founder and former CEO Bill Gates has donated billions worth of Microsoft stock to the Bill & Melinda Gates Foundation, and while the foundation continues to hold a large stake in Microsoft, it has sold shares in each of the last four quarters.

Keep in mind, the Gates Foundation has regularly sold off Microsoft shares for many years, which obviously reflects its philanthropic mission with the assets. There are other notable billionaire investors who still hold large stakes in Microsoft. Chase Coleman's Tiger Global Management is sitting tight with a $3 billion stake in the third quarter, while John Armitage's Egerton Capital was buying more shares.

Microsoft is experiencing tremendous momentum right now, which makes it tempting to follow these billionaires into the stock. But it's still difficult to pay a high P/E for the shares considering the impact of Microsoft's AI investments on its earnings growth. The recent sales by the Gates Foundation may reflect lower return expectations for the stock, which could be a warning for investors.

AI is fueling strong revenue growth

From a revenue growth perspective, Microsoft's business is performing about as well as any investor could hope. Microsoft cloud revenue grew 22% year over year in the first quarter, reaching $39 billion. Demand for Azure cloud services remains strong. Even Microsoft's personal computing business, including the Xbox gaming business, is enjoying a massive boost following the acquisition of Activision Blizzard.

Despite the stock's high P/E, one reason investors might want to hold is Microsoft's financial fortitude. Companies that produce growing free cash flows over time are going to find ways to surprise to the upside. Microsoft's high-margin business generated a whopping $72 billion in free cash flow over the last year. In the last quarter alone, it returned $9 billion to shareholders through dividends and share repurchases.

It's returning cash to shareholders while investing heavily in AI infrastructure. Microsoft has already integrated AI services across its software products. AI services contributed 12 percentage points to Azure's 33% year-over-year revenue increase last quarter. The company is clearly well-positioned to monetize AI and grow revenue over the long term.

But Microsoft's growth is coming at a cost

Microsoft is benefiting from strong demand for AI services, but one warning for investors is the lack of growth on the bottom line. While the company's total revenue grew 16% year over year last quarter, investments in AI pressured free cash flow, which fell 7% over the year-ago quarter. This is likely temporary, but the impact these investments are having on free cash flow in the near term could weigh on the stock's performance.

Going back to the Gates Foundation's sales, it's worth noting that the timing of those sales in recent years has correlated with the stock's value. In late 2022, when the stock was cheaper, the Foundation didn't sell any shares, as the stock offered attractive value and return prospects. The Foundation seems to understand the company's value and return prospects as well as anyone.

Wall Street expects Microsoft's earnings to increase by nearly 11% in fiscal 2025 (which ends in June). That isn't enough growth to justify the stock's high P/E multiple, especially when there are other Magnificent Seven stocks trading at lower valuations and offering better earnings growth prospects, such as Meta Platforms and Alphabet.

For an investor who already owns shares, I wouldn't sell and pay capital gains taxes just because the stock is temporarily expensive. Microsoft is a great business worth holding, but for an investor putting new money to work in the stock market, I would consider other opportunities first.

Should you invest $1,000 in Microsoft right now?

Before you buy stock in Microsoft, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Microsoft wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $869,885!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of November 18, 2024

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, 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. John Ballard has positions in Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.