Reassessing Microsoft (MSFT) After Recent Share Price Pullback

• If you are wondering whether Microsoft is fairly priced or if the recent pullback has improved the value on offer, you are not alone. This article is aimed directly at that question.
• Microsoft's share price last closed at US$401.14, with returns of a 6.8% decline over 7 days, a 16.3% decline over 30 days, a 15.2% decline year to date and a 1.4% decline over 1 year, while the 3 year and 5 year returns sit at 56.1% and 70.6% respectively.
• These moves are occurring against a backdrop of ongoing attention on Microsoft across areas such as cloud computing, productivity software and its position in broader technology indices. Investors are using this context to reassess what they are willing to pay for the stock at current levels.
• On our checks, Microsoft scores 5 out of 6 on valuation, with a value score of 5. We will look at how different valuation methods line up, and then finish with a more complete way to think about what the stock could be worth to you.

Microsoft delivered -1.4% 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 takes estimates of a company’s future cash flows and discounts them back to today’s dollars to arrive at an intrinsic value per share. It is essentially asking what those future cash flows are worth to you right now.

For Microsoft, the model used here is a 2 Stage Free Cash Flow to Equity approach, working off last twelve months free cash flow of about US$93.7b. Analysts provide free cash flow estimates for the next few years, and Simply Wall St then extends those projections further, up to 2035, based on that profile. By 2030, projected free cash flow sits at roughly US$164.8b, with the discounted value of that year’s cash flow at about US$109.6b.

When all projected cash flows are discounted and added together, the model arrives at an estimated fair value of US$456.59 per share. Compared with the recent share price of US$401.14, this DCF output suggests Microsoft trades at an implied 12.1% discount. On this specific cash flow view, the shares appear undervalued.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Microsoft is undervalued by 12.1%. Track this in your watchlist or portfolio, or discover 52 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 a profitable company like Microsoft, the P/E ratio is a useful way to think about what you are paying for each dollar of current earnings. Investors usually accept a higher P/E when they expect stronger growth or see lower risk, and a lower P/E when growth expectations are more modest or risks feel higher.

Microsoft currently trades on a P/E of about 25x. That sits below both the Software industry average of roughly 26.9x and the peer group average of about 29.6x. On those simple comparisons, the stock looks comparatively cheaper than many similar companies.

Simply Wall St also calculates a proprietary “Fair Ratio” for Microsoft of about 44.5x. This is an estimate of what the P/E might be, given factors such as the company’s earnings growth profile, profit margins, size, risk indicators and its Software industry classification. Because it incorporates these company specific inputs, the Fair Ratio can be more tailored than a broad peer or industry comparison.

Set against the current P/E of roughly 25x, the Fair Ratio of about 44.5x suggests the shares are trading below that modelled range.

Result: UNDERVALUED

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Upgrade Your Decision Making: Choose your Microsoft Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let us introduce you to Narratives. A Narrative is simply your story about Microsoft, written in numbers, where you set your own fair value and your expectations for future revenue, earnings and margins. It connects three things: how you think Microsoft’s business might develop, the financial forecast that follows from that view, and the fair value that drops out of those assumptions. On Simply Wall St, millions of investors use Narratives on the Community page as an easy tool to compare their view with others and to see how their fair value stacks up against the current share price. That comparison, Fair Value versus Price, is what helps you decide whether Microsoft looks attractive, fairly priced or expensive to you personally. Narratives also update automatically when new information such as results or news is added, so your view stays current without extra effort. For example, one Microsoft Narrative on the platform might assume a much higher fair value than another, reflecting a more optimistic outlook on growth and profitability compared with a more cautious view.

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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