Is Microsoft (MSFT) Now Attractive After Recent Share Price Weakness?

• Wondering if Microsoft at US$418.57 is a bargain, fairly priced, or too expensive for your portfolio? This article breaks down what the current share price might be implying about the stock.
• The share price has eased recently, with returns declining 1.2% over the past week, 1.4% over the past month, and 11.5% year to date, even though the 3 year and 5 year returns stand at 28.7% and 74.7% respectively.
• Recent headlines around Microsoft continue to focus on its role in software and broader technology themes. This helps explain why the stock often draws attention even when short term returns soften. This backdrop gives useful context when you weigh the recent 1 year return declining 6.3% against the longer term track record.
• On Simply Wall St's valuation checks, Microsoft scores a 6 out of 6 for being assessed as undervalued across multiple measures. Next you will see how approaches like DCF, P/E multiples, and asset based views line up, before finishing with a broader way to think about valuation beyond any single model.

Microsoft delivered -6.3% returns over the last year. See how this stacks up to the rest of the Software industry.

Approach 1: Microsoft Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow, or DCF, model estimates what a stock could be worth by projecting future cash flows and discounting them back to today, using the idea that cash received in the future is worth less than cash received now.

For Microsoft, the model uses a 2 Stage Free Cash Flow to Equity approach. It starts from last twelve month free cash flow of about US$93.7b. Analyst and extrapolated projections suggest free cash flow reaching US$181.1b by 2030, with a full 10 year path of estimates and extrapolations underpinning the calculation. All figures are assessed in US$, even though reporting and listing currencies can differ.

When these projected cash flows are discounted back to today, the DCF output indicates an estimated intrinsic value of roughly US$571.73 per share. Compared with the current share price of US$418.57, this implies the stock is trading at about a 26.8% discount to the DCF estimate. On this model, Microsoft stock is assessed as undervalued.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Microsoft is undervalued by 26.8%. Track this in your watchlist or portfolio, or discover 48 more high quality undervalued stocks.

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

Approach 2: Microsoft Price vs Earnings (P/E)

For profitable companies like Microsoft, the P/E ratio is a useful way to relate what you pay per share to the earnings the company is already generating. It helps you see how many dollars investors are currently willing to pay for each dollar of earnings.

What counts as a “normal” or “fair” P/E depends on how fast earnings are expected to grow and how risky those earnings appear. Higher expected growth or lower perceived risk can support a higher P/E, while slower growth or higher risk usually points to a lower one.

Microsoft currently trades on a P/E of 24.83x. That is below the Software industry average of 28.41x and also below the peer group average of 30.51x. Simply Wall St’s Fair Ratio for Microsoft is 40.73x, which is a proprietary estimate of what the P/E could be, given factors such as earnings growth, profit margins, industry, market cap and company specific risks.

This Fair Ratio aims to improve on simple peer or industry comparisons because it adjusts for the company’s own strengths and risk factors rather than assuming all companies deserve similar multiples. Comparing Microsoft’s current P/E of 24.83x with the Fair Ratio of 40.73x suggests the stock is undervalued on this measure.

Result: UNDERVALUED

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Upgrade Your Decision Making: Choose your Microsoft Narrative

Earlier it was clear there is more to valuation than any single model. Narratives are Simply Wall St’s way of letting you connect your view of Microsoft’s business to specific forecasts and a Fair Value. This lets you see, for example, how one investor who values Microsoft at about US$359 per share with a lower revenue growth rate of 3.6% and a future P/E of 26.25x compares with another who values it at about US$718 per share with higher implied revenue growth of roughly 19.0% and a future P/E of 30.5x. Both views are kept live on the Community page and update automatically as new earnings, news and assumptions flow through. This gives you a simple way to compare each Narrative’s Fair Value with the current US$418.57 share price to help you judge whether your own story points you toward Microsoft looking cheap, expensive or fairly priced.

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

These show how two informed investors can look at the same stock and reach very different conclusions about what feels attractive on price.

🐂 Microsoft Bull Case

Fair value: US$466.00 per share

Gap to this fair value at the current US$418.57 price: trading about 10.2% below the narrative fair value

Revenue growth used in this Narrative: 9.8%

• The author focuses on Microsoft’s cash generation, balance sheet strength and capital expenditure, arguing that heavy spending on data centers is a sign of strong underlying demand rather than strain.
• They highlight three reinforcing advantages around Microsoft 365 switching costs, Azure scale and the OpenAI partnership, while still acknowledging meaningful regulatory risks.
• Even with a positive view on the business, they look for a sizeable margin of safety and set a preferred entry range well below both the narrative fair value and the recent share price.

🐻 Microsoft Bear Case

Fair value: US$333.48 per share

Gap to this fair value at the current US$418.57 price: trading about 25.6% above the narrative fair value

Revenue growth used in this Narrative: 9.5%

• This Narrative sees Microsoft as a high quality business but argues that enthusiasm around AI and cloud has pushed the stock ahead of the author’s fair value range.
• It sets out assumptions for revenue growth, rising profit margins and ongoing buybacks, yet still concludes the current valuation already bakes in much of that progress.
• The risks section flags competition in productivity software, potential limits to Azure’s share gains, regulatory scrutiny and user experience issues as factors that could cap upside if expectations stay high.

If you want to go beyond the previews and see how different community Narratives connect expectations, risks and valuation for Microsoft, See what the community is saying about Microsoft.

Do you think there's more to the story for Microsoft? Head over to our Community to see what others are saying!

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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