Key Takeaways:
- The 2-Minute Valuation Model values Microsoft stock at $611/share in 2.5 years, implying nearly 50% upside today.
- Microsoft has averaged 26% annual returns over the past decade, so it’s not hard to imagine that the stock could see 16% annual returns over the next 2.5 years.
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Microsoft has averaged an impressive 26% annual return over the past decade, driven by its successful transition to cloud computing, the dominance of its Azure platform, and steady growth across its Office 365 and LinkedIn segments.
That said, Microsoft faces ongoing challenges in maintaining its cloud growth momentum as competition intensifies from Amazon Web Services and Google Cloud, while navigating macroeconomic pressures that could dampen enterprise spending.
Despite these headwinds, Microsoft remains a global leader in technology and innovation, with significant growth opportunities in AI, cloud computing, and enterprise solutions.
At current levels, the stock appears slightly undervalued, offering the potential for attractive long-term returns for patient investors.
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What is the 2-Minute Valuation Model?
There are 3 core factors that drive a stock’s long-term value:
- Revenue Growth: How big the business becomes.
- Margins: How much the business earns in profit.
- Multiple: How much investors are willing to pay for a business’s earnings.
Our 2-Minute Valuation Model uses a simple formula to value stocks:
Expected Normalized EPS * Forward P/E ratio = Expected Share Price
Revenue growth and margins drive a company’s long-term normalized EPS, and investors can use a stock’s long-term average P/E multiple to get an idea of how the market values a company.
Is Microsoft Undervalued?
Forecast
On Microsoft’s Analyst Estimates tab shown below, you can see analysts expect the company to grow revenue at a 14% compound annual growth rate over the next 3ish years, while normalized earnings per share, or EPS, are expected to grow at nearly 16% annually:
View Microsoft’s full analyst estimates >>>
For context, over the past 5 years, Microsoft’s revenue grew at about 14% per year, while earnings grew at 20% per year. That means the company is expected to grow at about the same rate as it has in the past.
Valuation Multiple
Microsoft currently trades at around $417 per share, which means the stock trades at about 11 times next year’s expected revenue and nearly 32 times next year’s expected earnings.
This is a pretty reasonable valuation, considering Microsoft’s 15% expected EPS growth and strong quality as a blue-chip company.
Microsoft has averaged a 31x forward P/E multiple over the past 5 years, so we’ll use a 30x P/E multiple in our valuation.
Fair Value
3.5 years from now, analysts estimate that Microsoft could reach about $20.10 in normalized EPS. At a 30x NTM P/E multiple, that values Microsoft stock in 2 and a half years at $603/share. When we tack on an extra $8/share for the dividends that Microsoft is expected to pay, we arrive at a final fair value of $611/share.
(The NTM P/E multiple uses the expected earnings for the next twelve months, so a 2.5-year valuation uses 3.5-year EPS forecast figures. We’re using 3.5-year forecast figures because Microsoft’s fiscal year ends in June, halfway through the year.)
With the stock trading at about $417 today, this implies that $MSFT could rise about 16.5% per year over the next 2.5 years, or 47% in total:
Microsoft is expected to grow earnings at 15% annually. As long as the stock maintains the same P/E multiple as it has for the past 5 years (which seems reasonable), it makes sense that the stock could see returns in the mid-teens due to earnings growth.
Analysts aren’t quite as bullish on Microsoft, but they still think the stock has upside today.
Analysts’ Price Target
The consensus analyst price target for Microsoft today is about $508 per share, which means analysts think the stock has just over 20% upside.
The blue line below shows analysts’ estimated upside for $MSFT stock over the past 5 years.
When the blue line was high, analysts thought Microsoft stock was undervalued. When the blue line was low, analysts thought Microsoft was overvalued.
The black line tracks Microsoft’s stock price, which has risen over 100% in the past 5 years.
You can see that analysts thought Microsoft was undervalued towards the end of 2022, and they think the stock has a decent amount of upside today:
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TIKR Takeaway
Using the 2-Minute Valuation Model, Microsoft stock appears undervalued and could deliver over 15% annual returns over the next 2 years.
Of course, this is just a valuation exercise. No one knows where a stock is headed in the short term, and few can predict where a stock is heading in the long term.
The TIKR Terminal offers industry-leading financial data on over 100,000 stocks and was built for investors who think of buying stocks as buying a piece of a business.
Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. We aim to provide informative and engaging analysis to help empower individuals to make their own investment decisions. Neither TIKR nor our authors hold positions in any of the stocks mentioned in this article. Thank you for reading, and happy investing!
