At a 6-Month Low, Here's My Top Dow Jones Stock to Buy Now

Microsoft (NASDAQ: MSFT) stock has gone nowhere over the last year and is currently hovering around a six-month low. The company has done an excellent job monetizing artificial intelligence (AI), but the reported efficiency improvements in AI models like DeepSeek have cast a spotlight on AI spending and sparked worry.

Out of the 30 components in the Dow Jones Industrial Average (DJINDICES: ^DJI), Microsoft stands out as a unique balance of growth potential, value, and a little passive income as the cherry on top of a strong underlying investment thesis. Many other Dow components have strong earnings growth or are a good value, but not both.

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Here's why Microsoft is my top Dow Jones stock to buy now.

Image source: Getty Images.

Running up too fast

Let's take a trip back to 2023: Microsoft is coming off a big down year, with the stock falling 28.7% in 2022 in lockstep with a brutal downturn across big tech.

Management hosted its second-quarter fiscal 2023 earnings call on Jan. 24, 2023. During the call, the company shared exciting news about AI and a partnership with OpenAI, including support for ChatGPT and news that Microsoft will be OpenAI's exclusive cloud provider -- led by Azure AI services.

As 2023 carries on, AI excitement takes off, with Nvidia (NASDAQ: NVDA) reporting exponential growth in sales of graphics processing units (GPUs) for data centers. Microsoft stock finished 2023 56.8% higher, closing out the year at $376.04 per share. Since then, the stock is up just 8.6%.

This is a good example of a company's stock price getting ahead of fundamentals. AI has been a game changer for Microsoft, leading to faster top-line growth and higher margins. But it hasn't led to paradigm-shifting growth in the same way as it has for other big tech stocks like Nvidia and Meta Platforms. Rather, Microsoft uses AI to improve existing products and develop new tools and services.

Microsoft is making strides across its business segments

Microsoft 365 Copilot is an AI tool for the company's flagship software suite. In its second-quarter fiscal 2025 earnings call, management called 365 Copilot "the UI for AI" -- meaning it is handling everyday employee productivity. (UI stands for user interface.) It continues to see accelerated adoption for 365 Copilot.

GitHub Copilot is helping improve developer efficiency. GitHub now has 150 million developers, a 50% increase in just two years.

In second-quarter fiscal 2025, Azure and other cloud services grew 31% year over year, including a 157% increase in AI services.

Beyond Microsoft 365, GitHub, and Azure, Microsoft has other software products like Teams, Bing, and LinkedIn. It also has a massive gaming segment with Xbox and Activision Blizzard and it sells consumer products like Microsoft Surface and computer accessories, among other things. Despite so many end markets and traditionally lower-margin hardware offerings, the company has grown revenue and margins at an impressive rate.

The following chart shows how Microsoft's accelerated sales growth in recent years has also come with higher margins, a testament to the profitability of AI investments.

MSFT revenue (TTM), data by YCharts; TTM = trailing 12 months.

However, there are concerns that Microsoft's AI spending may be overextended.

Cranking it up a notch

This fiscal year, management plans to spend $80 billion on AI and cloud-based applications. The massive investment could impact near-term profitability.

Analysts' consensus estimate calls for $13.16 in fiscal 2025 earnings per share (EPS) and $15.07 in fiscal 2026 EPS. For context, Microsoft reported $11.80 in diluted EPS in fiscal 2024, a 20% increase compared to fiscal 2023, whereas the fiscal 2025 target implies just 11.2% growth. So at least in the near term, earnings growth is decelerating. And margins could also decrease if AI spending doesn't immediately translate to measurable results.

Anytime a company bets big on an idea, it puts pressure on those investments to pay off. But there's also the risk of being too idle and falling behind in the AI race.

Therefore, the two biggest questions investors should ask are whether the company can afford to spend this much on AI without hurting its financial health, and if the investment dollars are going toward worthwhile endeavors.

In terms of financial health, Microsoft is as good as it gets. The company ended calendar year 2024 with $71.56 billion in cash, cash equivalents, and short-term investments and just $39.72 billion in long-term debt. In fiscal 2024, which ended June 30, 2024, it repurchased $17.25 billion in stock and paid $21.77 billion in dividends. While the dividend payment was higher, the buybacks were around $5 billion less than in fiscal 2023.

Management could continue pulling back on stock repurchases to fund its AI investments without taking on more debt. However, buybacks have helped offset Microsoft's stock-based compensation expense and reduce its share count over time, accelerating EPS growth. Fewer buybacks would put pressure on the core business to drive earnings growth.

In sum, Microsoft can afford to spend more on AI.

As for the second million-dollar question, there's reason to believe the AI investments are worth it. Microsoft is currently the No. 2 cloud player, ahead of Alphabet's Google Cloud but behind Amazon Web Services.

As demand for cloud computing grows to support AI workflows, Microsoft wants to ensure it is well positioned to take market share by providing advanced data centers and the best AI services. If it doesn't take market share, its investments could still pay off as long as the overall cloud computing pie grows.

A balanced stock to buy now

As a legacy tech company, Microsoft hasn't been transformed by AI in the same way as smaller, faster-growing companies like Palantir Technologies or more pure-play AI names like Nvidia have. But it has been a net positive for the company. And Microsoft has the financial health and deep pockets necessary to pour money into building out AI infrastructure.

The languishing stock price and steady earnings growth have pushed Microsoft's price-to-earnings ratio (P/E) to its lowest level in a year. In fact, its P/E is currently 33, which is right around its average over the last three to 10 years. But it is arguably a much higher quality business with better growth prospects today than in years past, making its valuation even more compelling.

As mentioned, management spends a ton on dividends every year. The company has increased its payout every year for nearly two decades, and although the stock yields just 0.8%, Microsoft's growing dividend provides an added incentive to buy and hold the stock.

With a diversified business model, an affordable AI budget, and a reasonable valuation, Microsoft checks all the boxes for a foundational growth stock to buy now and build a portfolio around.

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

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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. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, 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. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, Microsoft, Nvidia, and Palantir Technologies. 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.