Assessing Whether Microsoft (MSFT) Is Undervalued After Recent Share Price Weakness

Microsoft stock snapshot and recent performance

Microsoft (MSFT) has been under pressure recently, with the share price down about 1% over the past week, 6% over the past month, and 13% over the past 3 months, even as its core business remains large and diversified.

See our latest analysis for Microsoft.

Looking beyond the recent pullback, Microsoft’s share price has a year to date return of about a 4% decline, while its 1 year total shareholder return of 2.62% and 3 year total shareholder return of 93.42% suggest longer term holders have still seen meaningful gains. This points to fading short term momentum rather than a clear shift in the overall story.

If Microsoft’s recent moves have you reassessing tech exposure, it could be a good moment to scan other large players across high growth tech and AI stocks for fresh ideas.

So, with Microsoft delivering double digit annual revenue and net income growth, yet trading at around a 25% intrinsic discount and below analyst targets, are you looking at a genuine opportunity or a stock where future growth is already fully reflected in the current price?

Price to earnings of 32.2x, is it justified?

At a P/E of 32.2x, Microsoft trades at a higher earnings multiple than both the US software industry average of 30.9x and a peer average of 30.8x, even though Simply Wall St’s DCF estimate suggests the shares trade at a 24.6% discount to fair value.

The P/E ratio compares the share price to earnings per share, so a higher multiple usually reflects the market putting a richer price on each dollar of current earnings. For a business generating annual revenue of about US$293.8b and net income of roughly US$104.9b, that premium P/E hints that investors are still willing to pay up for its earnings profile.

Simply Wall St’s fair P/E estimate of 51.1x sits well above the current 32.2x, which suggests the market is pricing Microsoft more conservatively than that fair ratio implies, even as earnings have grown about 12.9% per year over the past 5 years and faster in the most recent year. Compared with sector and peer averages, the current multiple is only modestly higher, so any future shift toward the higher fair ratio level could mean a very different valuation backdrop to what the current price implies.

Explore the SWS fair ratio for Microsoft

Result: Price-to-earnings of 32.2x (UNDERVALUED)

However, higher expectations built into a 32.2x P/E, and any slowdown in revenue or net income growth, could quickly challenge the idea that Microsoft is attractively priced.

Find out about the key risks to this Microsoft narrative.

Another View, what does the DCF say?

Our DCF model puts Microsoft’s value at about US$603.18 per share versus the current US$454.52 price, which implies the stock trades at roughly a 24.6% discount. That supports the idea of undervaluation, but it also raises a question: are the cash flow assumptions too generous, or is the market being cautious?

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Microsoft for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 874 undervalued stocks based on their cash flows. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Build Your Own Microsoft Narrative

If you see the numbers differently, or if you prefer to work through the assumptions yourself, you can build a custom view in minutes by starting with Do it your way.

A great starting point for your Microsoft research is our analysis highlighting 4 key rewards and 1 important warning sign that could impact your investment decision.

Looking for more investment ideas?

If you stop with just one stock, you risk missing other opportunities that fit your style, so keep your shortlist growing with a few focused screeners.

• Spot companies priced below their estimated worth by running your own filters across these 874 undervalued stocks based on cash flows and see which names deserve a closer look.
• Target potential income payers by scanning these 13 dividend stocks with yields > 3% for businesses offering higher yields that might suit a dividend focused approach.
• Explore digital finance by sorting these 19 cryptocurrency and blockchain stocks for stocks tied to cryptocurrency and blockchain themes.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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