Microsoft Corporation (MSFT) — Fairly Valued With Convincing Growth Factors
Microsoft shares moved 33.0% over the last 52 weeks, with a high of $366.78 and a low of $213.43. During this time, the stock outperformed the S&P 500 index by 22.0%. As of April 2023, the company's 50-day average price is $325.52. Microsoft Corporation develops and supports software, services, devices and solutions worldwide. The large-cap Technology company has 221,000 full time employees and is based in Redmond, WA. Microsoft has returned a 0.8% dividend yield over the last 12 months.
Growing Revenues With Increasing Reinvestment in the Business:
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | |
|---|---|---|---|---|---|---|
| Revenue (MM) | $110,360 | $125,843 | $143,015 | $168,088 | $198,270 | $211,915 |
| Gross Margins | 65% | 66% | 68% | 69% | 68% | 69% |
| Operating Margins | 33.0% | 35.0% | 37.0% | 42.0% | 42.0% | 42.0% |
| Net Margins | 15.0% | 31.0% | 31.0% | 36.0% | 37.0% | 34.0% |
| Net Income (MM) | $16,571 | $39,240 | $44,281 | $61,271 | $72,738 | $72,361 |
| Net Interest Expense (MM) | $2,733 | $2,686 | $2,591 | $2,346 | $2,063 | $1,968 |
| Depreciation & Amort. (MM) | -$7,700 | -$9,700 | -$10,700 | -$9,300 | -$12,600 | -$11,000 |
| Earnings Per Share | $2.13 | $5.06 | $5.76 | $8.05 | $9.65 | $9.68 |
| EPS Growth | n/a | 137.56% | 13.83% | 39.76% | 19.88% | 0.31% |
| Diluted Shares (MM) | 7,794 | 7,753 | 7,683 | 7,608 | 7,540 | 7,472 |
| Free Cash Flow (MM) | $32,252 | $38,260 | $45,234 | $56,118 | $65,149 | $59,475 |
| Capital Expenditures (MM) | $11,632 | $13,925 | $15,441 | $20,622 | $23,886 | $28,107 |
| Net Current Assets (MM) | -$9,857 | -$5,611 | $72 | -$6,191 | -$23,593 | -$21,496 |
| Long Term Debt (MM) | $69,653 | $63,361 | $55,136 | $48,260 | $44,119 | $41,990 |
| Net Debt / EBITDA | 1.51 | 1.14 | 0.72 | 0.41 | 0.34 | 0.12 |
Microsoft's P/B and P/E Ratios Are Higher Than Average:
Compared to the Technology sector's average of 27.16, Microsoft has a trailing twelve month P/E ratio of 33.6 and, according to its EPS guidance of $11.92, an expected P/E ratio of 27.3. The company doesn't issue forward earnings guidance, and the compound average growth rate of its last 6 years of reported EPS is 28.7%. On this basis, the company's PEG ratio is 1.17. Substituting the 10.7% weighted average of the company's EPS growth rate and the overall market's expected 5-year EPS growth rate, we obtain a normalized PEG ratio of 3.13, which suggests that the company's shares are overvalued. Additionally, Microsoft seems overvalued in terms of its book value, since its P/B ratio is 11.91 compared to its sector average of 6.23. As of the date of publication, the company's shares are trading 325.4% above their Graham number of $77.69. In summary, Microsoft's strong cash flow trend and reasonable levels of debt attenuate the company's lofty valuation in terms of earnings and assets.
Microsoft Has an Average Rating of Buy:
44 analysts are following Microsoft and have set target prices ranging from $269.0 to $414.96 per share. On average, they have given the company a rating of buy. At the current price of $325.52, MSFT is trading -12.1% away from its average analyst target price of $370.22 per share, implying an analyst consensus of some upside potential for the stock. The company has a very low short interest since 0.5% of the company's shares are tied to short positions. Institutions own 73.2% of Microsoft's shares, while the insider ownership rate stands at 0.05%. which is a small amount of insider investors. The company's biggest shareholder is Vanguard Group Inc with a 9% stake in the company worth $215,917,910,581.
