Microsoft (NASDAQ:MSFT) is one of the major tech giants in the market. The company has strong fundamentals and special features that make investors happy, such as buyouts and dividend increases. With gains of around 50% year-to-date (YTD), MSFT stock has also outperformed the US stock market as a whole. All eyes are now on the Fiscal 2022 first quarter earnings report, which the company released on October 26.

Does MSFT have more upside potential this year? Reporting on the results is crucial for the company to maintain its strong momentum. Primarily, the two factors that concern me now about Microsoft are the premium reflected in its share price and the potential slowdown in its revenue growth.

Here’s what you need to know about MSFT stocks going forward.

MSFT action: consistency and solid balance sheet

Microsoft is premium stock. It is very profitable and has increased income and equity as well as reduced debt. At the same time, it also set up a share buyback program and regularly increased its dividend. In fact, this consistency is something I appreciate the most about MSFT.

The growth figures speak for themselves here. Data taken from The morning star shows solid 3-year average growth in sales (15.06%), operating income (25.87%), net income (54.63%) and diluted earnings per share (EPS) (55 , 77%). Another positive factor is the strong balance sheet. Microsoft reduced its debt to equity ratio (D / E) to 0.42.

On top of all that, one of my favorite financial metrics – Free Cash Flow (FCF) – also demonstrates the strength of the name. Free cash flow has been steadily increasing for years. For fiscal 2021, Microsoft reported FCF of $ 56.12 billion, a 24% year-over-year (YOY) increase. This FCF is particularly exceptional, the company posting a gross margin (68.9%), an operating margin (41.6%) and a net margin (36.4%) also high over the period.

All in all, Microsoft pulled out all cylinders last year – and it seems to continue to capitalize on that strength.

Dividend increases and share buybacks

As I have already noted, another reason to love MSFT stocks is the increase in dividends and share buybacks. The consistency of the company in this department is remarkable. What’s more, on September 14, Microsoft announced very positive news for shareholders.

The news? A quarterly dividend of 62 cents – an 11% increase from the previous quarter – as well as a “new share buyback program allowing up to $ 60 billion in share buybacks.”

For some time now, the number of shares outstanding here has been declining while the annual dividend has increased. In particular, Microsoft appears to be tracking an average annual increase of 10% in its dividend. Notably, however, his current payout of around 27% is both sustainable and also the lowest ratio reported in recent years.

Thus, Microsoft has rewarded investors with a consistent dividend policy and consistent share buybacks. This is a big plus for investors. But the company could easily increase its dividend rate from here, given the current payout ratio. My best guess? Management will soon weigh the trade-off between future growth and the return of capital to its shareholders.

What to do with recent gains

Dividends and the like aside, however, I had a different primary concern with MSFT stocks. My concern? The potential slowdown in income and profits. However, the recent earnings report revealed a few bright spots.

When Microsoft released its results for the first quarter of fiscal 2022 at the end of October, it showed a “good start to the year.” Specifically, executive vice president and chief financial officer Amy Hood noted that Microsoft Cloud generated “$ 20.7 billion in revenue for the quarter, up 36% year-over-year.” In addition, the turnover for the period amounted to 45.3 billion dollars, an increase of 22%. Meanwhile, operating income was $ 20.2 billion – up 27% – and non-GAAP net income was $ 17.2 billion. The latter was an increase of 24%. Finally, non-GAAP diluted earnings per share (EPS) was $ 2.27, up 25%.

These financial results show that a slowdown in growth does not seem possible, at least not yet. But what if we see hiccups in the next few quarters? Well, investors may want to take future results with a grain of salt.

In a nutshell, it all comes down to seasonality. In the company’s 10-K annual report for fiscal 2021, Microsoft said the following (page 40):

“Our revenues fluctuate quarterly and are generally higher in the second and fourth quarters of our fiscal year. Second quarter revenue is driven by year-end business spending trends in our core markets and consumer spending over the holiday season, and fourth quarter revenue is driven by multi-year on-site contract volume executed during the period.

So while investors may be inclined to worry about hiccups going forward, they may not have as much, especially for the first and third quarters.

A diversified company and expensive stocks

The last thing I’ll note about Microsoft, however, is how relevant the company has been in recent years – and how diverse it is.

On the one hand, Microsoft has embraced the digital working environment wholeheartedly. It has several diversified revenue sources – from Xbox and LinkedIn to cloud computing, virtual reality (VR) and artificial intelligence (AI). In addition, it also made changes to its investment metrics, improving transparency and helping investors to accurately assess the company’s progress. But does all of this mean you should invest in MSFT stocks?

Business perks aside, MSFT is still a tough name to consider buying right now. Of course, relative valuation is only a method of analysis. However, data from CSI Market is mixed on whether Microsoft is undervalued or not. For example, the price / earnings (P / E) ratio is currently 37.26, compared to the industry P / E of 35 and the industry P / E of 27.

That said, Microsoft also has a PEG ratio of 0.84. This suggests that he is undervalued. However, by checking the price-to-sales (P / S) ratio of 14, the company’s P / S is also above the industry median. The same goes for the price-to-book (P / B) ratio and the price-to-cash flow ratio of the business.

Overall, these metrics suggest that MSFT stock is now trading at a premium.

The verdict on MSFT Stock

All in all, MSFT stock is a great name that trades at an extremely high cost.

This company benefits from solid fundamentals and robust growth. It also reimburses capital to shareholders. Still, it’s incredibly expensive too. Any massive sell-off would be a better risk-adjusted investment opportunity here – unless Microsoft raises its dividend rate even faster or expands its share buyback program.

At some point, a slowdown in revenue and EPS may come into play. This factor will be crucial for potential investors. However, it can also take a long time to happen.

At the date of publication, Stavros Georgiadis had (directly or indirectly) no position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to the publication guidelines of InvestorPlace.com.

Stavros Georgiadis is a CFA Chartered Equity Research Analyst and Economist. He focuses on US stocks and has his own stock blog at thestockmarketontheinternet.com. He has written various articles for other publications in the past and can be contacted on Twitter and on LinkedIn.