Microsoft Stock Vs S&P 500: Which Is Best?

Microsoft (NASDAQ:MSFT) is one of the biggest companies in the world, with operations across the globe in all aspects of hardware and software technology.

Its revenue skyrocketed as its enterprise, productivity, and gaming platforms gained in popularity and usage amid shelter-in-place orders. The company owns brands like LinkedIn, Skype, Windows, Surface, Xbox, Azure, GitHub, and more.  

As a component of the S&P 500 (SPY), it helped hold the index up through the pandemic; it reached an all-time high market capitalization of $1.59 trillion. However, it wasn’t the only company helping to bring the S&P 500 to its own historic high market value, leaving some investors wondering which is better between Microsoft stock vs S&P 500.

Not only does the S&P 500 include high-performing stocks from a wide variety of companies, it can replace underperforming assets with a hungry new entrant, like Tesla (NASDAQ:TSLA). Does Microsoft have the cash and resources to compete?

Microsoft Stock Quadrupled Because…

Microsoft rose to prominence in the 20th Century because of its Windows operating system, which once dominated the world to the point that Apple co-founder and then-CEO Steve Jobs was fired.

But it never stopped at just the OS – co-founder and then-CEO Bill Gates was a savvy businessman who created an entire Windows-based ecosystem.

Free tools like Media Player, Office, and Internet Explorer squeezed out competitors, and the company found itself in an antitrust suit.

In the 21st Century, the company pivoted to a cloud-based, software-as-a-service (SaaS) business model.

Its rivalry with Apple was expanded to include the likes of Amazon (AMZN), Google (GOOG), Sony (SNE), Salesforce (CRM), and most recently Zoom (ZM). This helped the company rise about 400 percent in value over the past five years, from about $50 in 2015 to around $200 per share. 

This is the type of exponential growth you wouldn’t expect in a company as old and established as Microsoft already was by 2000. It proves that the markets it serves and the innovations it pursues have value.

Sure, Microsoft has had its misses (remember Zune?), but its main strategy of developing what it can and buying what it can’t pays off over time.

It even invested to expand its gaming presence across all devices (including its next-generation Xbox Series S and X consoles) by acquiring ZeniMax media.

Let’s explore how these moves and its stock performance compares to the S&P 500.

Should You Invest In S&P 500?

Because it includes Microsoft, the S&P 500 market index has a much higher buy price. However, it’s not as simple as just including 500 companies – each is selected through a rigorous process that most companies simply don’t qualify for.

This includes a high level of trades, high market value, and a full year of profitability. Components are also weighted so high market caps like Microsoft’s don’t dominate the entire index and create drag.

In this manner, it’s a relatively fair glimpse at the overall market and is often cited as such.

To give you an idea of how hard it is to join the S&P 500, Tesla (TSLA) isn’t included, despite the company outperforming Microsoft over the past five years by increasing its market capitalization by a multitude of 10.

When a company starts to underperform, it gets replaced. Macy’s, for example, was kicked out of the index amid the economic slowdown, while Etsy (ETSY) was included before Tesla (TSLA).

And just because it has such widespread reach doesn’t mean that it’s impervious to market conditions. The coronavirus pandemic proved the S&P 500 can crash, and having so many companies involved seems to have limited its growth potential compared to Microsoft over the past five years. Its share value was around $2000 in 2015, while it hovers around $3500 at the end of 2020.

This simple comparison shows Microsoft was the better investment for the past five years, but that’s not guaranteed to repeat over the next five.

Will Slower Computer Sales Hurt Microsoft Stock?

The path ahead is no easier for Microsoft than it was 20 years ago – it doesn’t have the same consumer hold it once had, but it leveraged its Teams program to bottleneck Zoom’s 2020 growth potential.

It’s also facing a competitive holiday season against rival Sony as the console wars come to a head for the next generation of video game consoles.

And its Edge browser and Cortana smart assistant are behind the competition, while the company’s Surface lineup is the closest it has to a mobile presence, despite owning Nokia.

Microsoft as a company will surely survive through to 2030 and beyond, but it’s not guaranteed to be an easy path for investors coming in at today’s inflated price.

Computer sales could stagnate in 2021, and CEO Satya Nadella’s focus on cloud-computing is more of a reactive move than the proactive moves you’d want. There’s a chance Microsoft will underperform the S&P 500 over the next five years.

The S&P 500 Is More Diversified But…

The S&P 500 index also isn’t immune to problems, as alluded to above. Even its spread didn’t prepare it for the post-election market shift, as investors flocked away from “stay at home” stocks toward “reopened economy” stocks.

This caused tech stocks across the board to suffer while trade picked up on other sectors. Issues like this could cause a lot of short-term blips.

Many long-term retirement plans are based on the S&P 500, and this is perhaps the best way to invest in it.

While Microsoft (or any individual stock really) is an ideal investment for day traders, long-term traders could benefit from the low-risk, lower-reward index investment.

S&P 500 Vs Microsoft Stock: The Bottom Line

Microsoft is a leading tech company and one of the biggest in any sector. It’s a major component of the S&P 500 and outperformed it over the past five years. However, the next five years will be a major test for the American economy, and it’s unclear exactly how Microsoft will perform.

In general, the S&P 500 is a good long-term investment for those seeking something to invest their 401k funds into. Microsoft is a riskier play, but the potential rewards could be huge if it wins its wars against the likes of Sony, Google, and Apple for tech supremacy. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.