Is Microsoft’s Valuation Justified After Wayve Funding Talks and AI Growth News?

If you’re wondering what to do with Microsoft stock after its recent price moves, you’re in good company. Even longtime investors are paying attention as the numbers roll in. Microsoft closed at $514.05 in the latest session and, despite a slight 2.7% dip over the past week, the stock has still managed to eke out a modest 0.8% gain over the last month. Looking at a broader timeline, those returns appear even more impressive, with year-to-date gains of 22.8% and a 121.8% climb over the past three years. It’s clear there’s growth energy here, even when short-term jitters creep into the picture.

The market’s current mood around Microsoft is a fascinating mix of optimism and caution. On one hand, news such as Microsoft’s ongoing struggles to keep up with high cloud demand signals both booming business and operational challenges. Meanwhile, partnerships for AI-powered products, like the recent Copilot project with Harvard Medical School, suggest Microsoft is focusing on long-term growth areas that could reshape how people work and interact with technology. On the investment side, strategic conversations such as Microsoft’s talks to possibly fund a $2B round for Wayve, the U.K. tech upstart, underscore their appetite for innovation and relevance in emerging fields.

With all this in play, how do we decide what Microsoft is really worth right now? Here’s a helpful anchor: based on six core valuation checks, Microsoft earns a score of 3. That means it’s undervalued in exactly half the areas most professional analysts monitor. Next, we’ll break down those valuation methods one by one. If you’re looking for a clear way to approach Microsoft’s true worth, keep reading to the end—we’ll share one more way to think about it.

Why Microsoft is lagging behind its peers

Approach 1: Microsoft Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow (DCF) model estimates what a company is worth today by projecting its future cash flows and discounting them back to the present. This approach gives investors a sense of the business’s intrinsic value based on its ability to generate cash in the years ahead.

Microsoft’s current Free Cash Flow sits at $83.9 Billion. Analyst estimates cover the next five years, but projections extend out to 2035 using both analyst forecasts and longer-term assumptions. By 2030, Microsoft’s Free Cash Flow is expected to reach $199.5 Billion, highlighting significant growth potential as the company scales both its core businesses and new ventures.

After applying the DCF model’s "2 Stage Free Cash Flow to Equity" methodology, Microsoft’s estimated intrinsic value lands at $502.05 per share. Compared to the recent closing price of $514.05, this indicates the stock is around 2.4% above its intrinsic value. This suggests it is essentially trading in line with its fair worth right now.

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

The price-to-earnings (PE) ratio is widely used for valuing profitable companies like Microsoft because it offers a straightforward snapshot of how much investors are willing to pay today for a dollar of the company’s current earnings. Since Microsoft generates consistent profits, the PE ratio serves as a practical benchmark for comparing its current valuation to that of its peers and the broader industry.

Various factors influence what a reasonable or “fair” PE ratio should be. Companies with high growth expectations, robust profit margins, and lower perceived risks tend to command higher PE multiples. On the other hand, higher risk or slowing growth typically drives the ratio down. Understanding where Microsoft fits into this spectrum helps gauge whether the market is assigning it a justified valuation.

Microsoft’s current PE ratio stands at 37.52x. This is higher than the average for the software industry, which is at 34.85x, and slightly lower than its peer group average of 39.57x. However, Simply Wall St’s proprietary “Fair Ratio” for Microsoft is calculated at 56.04x. The Fair Ratio accounts for more than just industry and peer averages. It is tailored to include Microsoft’s specific growth trajectory, risk profile, profit margins, industry dynamics, and market capitalization. As a result, it provides a more comprehensive view of what the company should be worth according to its fundamentals.

When comparing Microsoft’s actual PE ratio to its Fair Ratio, the stock looks undervalued on this metric. The difference between the two is significant, suggesting the market isn’t fully pricing in Microsoft’s favorable characteristics at this time.

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 hinted at a smarter, more dynamic way to understand what Microsoft is really worth. Now, let’s talk about Narratives. A Narrative is your story behind the numbers: instead of simply accepting generic fair value models, Narratives let you combine your own perspective on Microsoft’s future with financial forecasts and valuation. This means you can weave together your personal view of the business, expectations for future revenue, margins, and risks, building your own estimate of its fair value.

Narratives bridge the gap between a company’s evolving story and its numbers, empowering you to visualize how new information and your outlook translate into buy or sell opportunities. Available on Simply Wall St’s Community page, Narratives are intuitive to use, and millions of investors are already leveraging this tool to see exactly how much a stock is worth based on their assumptions, not someone else’s. Crucially, Narratives automatically update when news, earnings, or other fundamentals change, ensuring your view stays relevant and data-driven.

For example, some investors see Microsoft’s rapid AI and cloud growth fueling a fair value over $700 per share, while the most cautious project values as low as $325, based on their views of risks and execution. With Narratives, you see these perspectives side by side, helping you make decisions with more clarity and conviction.

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

🐂 Microsoft Bull Case

Fair Value: $620.74

Current discount: -1.1%

Revenue Growth Expected: 14.78%

• Rapid AI and cloud expansion, along with strong subscription adoption, are expected to drive sustainable high-margin growth and provide reliable future earnings.
• Enterprise demand for Azure and integrated cybersecurity solutions reinforces recurring revenue and margin stability, even as capital expenditure remains high.
• Analysts see Microsoft’s upside at 18.8% above the latest share price if aggressive earnings growth and margin assumptions are met.

🐻 Microsoft Bear Case

Fair Value: $333.48

Current premium: 54.1%

Revenue Growth Expected: 9.5%

• Microsoft is a clear AI leader and is dominant in SaaS, but the current share price already reflects high expectations for future growth and margin improvements.
• Slowing growth in segments like LinkedIn and some cloud platform headwinds may challenge margin expansion and could make it difficult to sustain double-digit growth rates in the long term.
• The market premium suggests investors may need to be patient, as tangible AI-driven cash flows may take years to fully materialize while competitors continue to innovate aggressively.

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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