Can Microsoft’s Valuation Still Climb After Folding AI Into Office?

Thinking about what to do with your Microsoft shares, or deciding whether now is the right time to buy or hold? You’re not alone. Microsoft has been on a tear, with the stock climbing 23.2% since the start of the year and 24.7% over the past 12 months. Looking further back, the numbers are even more impressive, boasting over 100% returns in the last three and five years. Clearly, investors have confidence in Microsoft’s long-term growth story. But what is actually driving these moves?

Part of the enthusiasm comes from Microsoft’s consistent push into AI. Just last week, the company announced plans to fold its AI subscription service into Office, creating a seamless way for users to access advanced chatbot features. Microsoft’s deep ties to OpenAI are also notable, highlighted by OpenAI’s recent $500 billion valuation and new large semiconductor deals for AI data centers. These factors show why the market is excited about Microsoft’s prospects. Even their gaming arm is seeing growth, with ad-supported Xbox Cloud Gaming set to roll out soon. These developments demonstrate Microsoft’s determination to extend its reach across high-growth areas.

Of course, all this positive momentum raises the question: is Microsoft’s stock still undervalued, fairly priced, or overstretched? Based on our assessment using six widely accepted valuation checks, Microsoft scores a 2, indicating it is considered undervalued in 2 out of 6 areas. We will break down exactly how that score is calculated and discuss an often overlooked way to gauge Microsoft’s value next.

Microsoft scores just 2/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.

Approach 1: Microsoft Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow (DCF) analysis estimates a company's intrinsic value by projecting its future cash flows and discounting them back to today's dollar value. For Microsoft, this approach provides a perspective on what the business could be worth based purely on its ability to generate cash in the years ahead.

Microsoft's latest trailing twelve-month Free Cash Flow (FCF) stands at $83.87 billion. Analyst estimates, which are available for the next five years, project steady growth. By 2030, projected FCF rises to $199.48 billion, according to further extrapolations. The methodology assumes that, after analyst estimates end, Simply Wall St continues the trend using reasonable assumptions about growth and business conditions.

The outcome of this model indicates an intrinsic fair value of $497.41 per share using the 2 Stage Free Cash Flow to Equity method. Compared to Microsoft's current share price, the DCF valuation implies the stock is 3.7% overvalued, putting the price very close to its calculated fair value.

Result: ABOUT RIGHT

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Microsoft.

Simply Wall St performs a valuation analysis on every stock in the world every day (check out Microsoft's valuation analysis). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes.

Approach 2: Microsoft Price vs Earnings (PE Ratio)

The Price-to-Earnings (PE) ratio is one of the most reliable methods for valuing consistently profitable companies like Microsoft. It helps investors gauge whether the stock's price reflects expected future earnings by comparing market price to net profit. Typically, companies with stronger earnings growth or lower risk tend to justify higher PE ratios. Firms facing stagnation or uncertainties will warrant lower multiples.

Currently, Microsoft trades at a PE ratio of 37.6x. This lines up closely with the average of its publicly traded peers at 38.9x and sits above the broader Software industry average of 35.6x. These comparisons suggest Microsoft is priced similarly to other leading software names, pointing to the market's recognition of its growth trajectory and stability.

To add more precision, Simply Wall St’s “Fair Ratio” is a tailored benchmark that incorporates not only industry and peer multiples, but also Microsoft’s unique growth outlook, market cap, profitability, and risks. Unlike standard averages, the Fair Ratio better reflects what an appropriate PE should be, given the company’s specifics. In Microsoft's case, the Fair Ratio sits at 56.1x, substantially higher than its current multiple. This signals that, when taking all these factors into account, Microsoft’s current valuation is below what would be expected for a business of its caliber.

Result: UNDERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Microsoft Narrative

Earlier we mentioned that there's an even better way to understand valuation, so let's introduce you to Narratives. A Narrative is a simple, powerful way for investors to build their own “story” about Microsoft, connecting what you expect for the company’s future revenue, earnings, and margins to a personal estimate of fair value.

Instead of just crunching numbers, Narratives bring your investment view to life by tying your forward-looking assumptions and insights directly to financial forecasts and a calculated fair value. This approach makes the investment decision process more meaningful. Now, you can decide whether to buy, hold, or sell by comparing your own Fair Value with the current share price, all in one clear view.

Accessible on Simply Wall St’s Community page and used by millions of investors, Narratives are dynamic. As new information arrives from quarterly earnings or breaking news, the fair value and your story update in real time, keeping your outlook current.

For example, some investors believe Microsoft will outpace analyst forecasts and see fair value as high as $700 per share, while others, more cautious about AI adoption or market risks, might set fair value down at $350. That range shows how Narratives help everyone understand and act on their unique view, not just the consensus.

For Microsoft, however, we'll make it really easy for you with previews of two leading Microsoft Narratives:

🐂 Microsoft Bull Case

Fair value: $613.89

Current undervaluation: -16.0%

Expected revenue growth: 14.7%

• Rapid AI and cloud integration, plus a strong subscription model, are fueling sustainable high-margin growth and better earnings predictability.
• Enterprise demand for cloud and security supports long-term margin stability, while large contract backlogs point to durable recurring revenue.
• Analysts expect Microsoft to reach $425B revenue and $158B earnings by 2028; consensus price target suggests shares are undervalued versus future prospects.

🐻 Microsoft Bear Case

Fair value: $333.48

Current overvaluation: 54.7%

Expected revenue growth: 9.5%

• Microsoft’s current premium reflects exuberance around AI and cloud growth, but cash flow from AI could take years to materialize.
• Growth in business apps (Teams, LinkedIn) and Azure is strong, but markets are nearing saturation and competition is rising, potentially slowing future growth.
• Despite robust profitability and big investments in AI, reaching higher margins from already elevated levels may be challenging amid antitrust scrutiny and market maturity.

Do you think there's more to the story for Microsoft? Create your own Narrative to let the Community know!

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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