Is Microsoft Corporation (NASDAQ:MSFT) Undervalued After Accounting For Its Future Growth?

Microsoft Corporation (NASDAQ:MSFT) is considered a high growth stock. However its last closing price of $94.43 left investors wondering whether this growth has already been factored into the share price. Let’s take a look at some key metrics to determine whether there's any value here for current and potential future investors. Check out our latest analysis for Microsoft

What are the future expectations?

One reason why investors are attracted to MSFT is the high growth potential in the near future. Expectations from 32 analysts are extremely bullish with earnings per share estimated to surge from current levels of $1.237 to $4.564 over the next three years. This results in an annual growth rate of 30.98%, on average, which signals a market-beating outlook in the upcoming years.

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

Microsoft is available at price-to-earnings ratio of 76.33x, showing us it is overvalued based on current earnings compared to the software industry average of 34.33x , and overvalued compared to the US market average ratio of 18.71x .

We already know that MSFT appears to be overvalued when compared to its industry average. But, seeing as Microsoft is perceived as a high-growth stock, we must also account for its earnings growth, which is captured in the PEG ratio. A PE ratio of 76.33x and expected year-on-year earnings growth of 30.98% give Microsoft a quite high PEG ratio of 2.46x. Based on this growth, Microsoft's stock can be considered overvalued , based on fundamental analysis.

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: Is 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.