Does Microsoft Corporation's (NASDAQ:MSFT) Stock Price Account For Its Growth?

Growth expectations for Microsoft Corporation (NASDAQ:MSFT) are high, but many investors are starting to ask whether its last close at $117.05 can still be rationalized by the future potential. Let’s take a look at some key metrics to determine whether there's any value here for current and potential future investors.

View our latest analysis for Microsoft

Should you get excited about MSFT's future?

Investors in Microsoft have been patiently waiting for the uptick in earnings. If you believe the analysts covering the stock then the following year will be very interesting. Expectations from 31 analysts are bullish with earnings per share estimated to rise from today's level of $4.363 to $5.625 over the next three years. On average, this leads to a growth rate of 11% each year, which illustrates an optimistic outlook in the near term.

Is MSFT's share price justifiable by its earnings growth?

Microsoft is available at price-to-earnings ratio of 26.83x, showing us it is undervalued based on its latest annual earnings update compared to the Software average of 52.08x , and overvalued compared to the US market average ratio of 17.17x .

Microsoft's price-to-earnings ratio stands at 26.83x, which is low, relative to the industry average. This already suggests that the stock could be undervalued. However, to properly examine the value of a high-growth stock such as Microsoft, we must reflect its earnings growth into the valuation. I find that the PEG ratio is simple yet effective for this exercise. A PE ratio of 26.83x and expected year-on-year earnings growth of 11% give Microsoft a quite high PEG ratio of 2.42x. Based on this growth, Microsoft's stock can be considered overvalued , based on the fundamentals.

What this means for you:

MSFT's current overvaluation could signal a potential selling opportunity to reduce your exposure to the stock, or it you're a potential investor, now may not be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:

1. Financial Health: Are MSFT’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
2. Past Track Record: Has MSFT been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of MSFT's historicals for more clarity.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.