Don't Buy Microsoft (MSFT) Before Checking Its Fundamentals!

Microsoft returned gains of 8.0% last year, with its stock price reaching a high of $308.93 and a low of $213.43. Over the same period, the stock outperformed the S&P 500 index by 8.0%. More recently, the company's 50-day average price was $272.94. Microsoft Corporation develops, licenses, and supports software, services, devices, and solutions worldwide. Based in Redmond, WA, the large-cap Technology company has 221,000 full time employees. Microsoft has not offered a dividend during the last year.

Growing Revenues With Increasing Reinvestment in the Business:

2019-06-30 2020-06-30 2021-06-30 2022-06-30
Revenue (MM) $125,843 $143,015 $168,088 $198,270
Gross Margins 65.9% 67.8% 68.9% 68.4%
Operating Margins 34.1% 37.0% 41.6% 42.1%
Net Margins 31.18% 30.96% 36.45% 36.69%
Net Income (MM) 39,240 44,281 61,271 72,738
Net Income(MM) $39,240 $44,281 $61,271 $72,738
Interest Cost $76,000 $89,000 -$215,000 $31,000
Depreciation & Amort. -$11,682,000 -$12,796,000 -$11,686,000 -$14,460,000
Earnings Per Share $5.06 $5.76 $8.05 $9.22
EPS Growth n/a 13.83% 39.76% 14.53%
Diluted Shares (MM) 7,753 7,683 7,608 7,435
Free Cash Flow (MM) $38,260 $45,234 $56,118 $65,149
Net Current Assets (MM) -$8,674 -$1,092 -$7,385 -$28,614
Current Ratio 2.53 2.52 2.08 1.78
Long Term Debt $66,662,000 $59,578,000 $50,074,000 $47,032,000
Net Debt / EBITDA 1.1 0.75 0.53 0.37

Microsoft's P/B and P/E Ratios Are Higher Than Average:

Microsoft has a trailing twelve month P/E ratio of 29.6, compared to an average of 27.16 for the Technology sector. Based on its EPS guidance of $10.91, the company has a forward P/E ratio of 25.0. Microsoft's PEG ratio is 3.01 on the basis of the 9.8% weighted average of the company and the broader market's EPS compound average growth rates. This suggests that the company's shares are overvalued. Furthermore, Microsoft is likely overvalued compared to the book value of its equity, since its P/B ratio of 13.77 is higher than the sector average of 6.23. The company's shares are currently trading 417.6% above their Graham number. Overall, Microsoft's lofty valuation in terms of earnings and assets is to some extent attenuated by its strong cash flow trend and reasonable levels of debt.

Analysts Give Microsoft an Average Rating of Buy:

The 46 analysts following Microsoft have set target prices ranging from $232.0 to $400.0 per share, for an average of $324.04 with a buy rating. As of April 2023, the company is trading -15.8% away from its average target price, indicating that there is an analyst consensus of some upside potential.

Microsoft has a very low short interest because 0.5% of the company's shares are sold short. Institutions own 73.8% of the company's shares, and the insider ownership rate stands at 0.05%, suggesting a small amount of insider investors. The largest shareholder is the Vanguard Group, Inc., whose 9% stake in the company is worth $197,465,222,835.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.