Microsoft Stock: Stellar but Overpriced！
$Microsoft(MSFT)$ , while no longer the world's largest company, remains synonymous with success. Over recent years, it's almost always been a great time to buy into this tech giant.
Business-wise, Microsoft continues to thrive and expand at an impressive pace. Sounds like a dream come true, right? But there's a catch: Microsoft's stock price is just too darn expensive!
Microsoft's Performance "Excel"
The company's fiscal Q3 2024 earnings (ending March 31) boasted robust growth across all three business segments.
The Intelligent Cloud (Azure cloud services) led the charge with a 21% jump in revenue to $26.7 billion, fueled by the AI hype.
The More Personal Computing division (games, hardware), buoyed by the Activision Blizzard acquisition, finally saw a quarterly growth of 17% after several sluggish quarters.
The Productivity and Business Processes division (Office subscriptions) increased its income by 12%.
The upcoming Q4 earnings on July 30th are expected to deliver yet another pleasant surprise for investors. However, owning a piece of this pie now requires paying a hefty premium.
Microsoft's Stock is Simply too Pricey
The problem lies in Microsoft's soaring stock price amidst growing earnings. It's trading at a forward P/E ratio of 33, which isn't cheap compared to the $S&P 500(.SPX)$ 's 22.7.
Granted, forward P/E relies on analysts' projections and isn't a flawless valuation tool. But comparing it to Microsoft's historical average P/E of 32 over the past five years reveals a "premium expectation." Essentially, the stock price has already baked in next year's earnings growth.
It might seem reasonable to assume that Microsoft could shrink its P/E back to the average level in a year. But here's the rub: the past five years saw historically low interest rates, which might have inflated long-term P/E estimates.
Historically, a more realistic average P/E for a company like Microsoft would be closer to 25. To achieve that valuation, the company would need a whopping 54% earnings growth – not impossible, but certainly a tall order that could eat into future years' growth potential.
Therefore, while Microsoft's business prospects remain rosy, its stock price might have already factored in too much of that optimism.
Investors might want to consider other large-cap tech stocks like $Alphabet(GOOG)$ $Alphabet(GOOGL)$ $Meta Platforms, Inc.(META)$, which currently trade at around 25 P/E and offer comparable or even higher growth rates, potentially unlocking more upside potential in the future.
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