Is Microsoft Corporation’s (NASDAQ:MSFT) Growth Strong Enough To Justify Its July Share Price? - Simply Wall St

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Microsoft Corporation (NASDAQ:MSFT) is considered a high-growth stock, but its last closing price of $138.9 left some investors wondering if this high future earnings potential can be rationalized by its current price tag. Below I will be talking through a basic metric which will help answer this question.

See our latest analysis for Microsoft

What are the future expectations?

Analysts are predicting good growth prospects for Microsoft over the next couple of years. The consensus forecast from 31 analysts is bullish with earnings per share estimated to surge from current levels of $4.548 to $6.166 over the next three years. This indicates an estimated earnings growth rate of 12% per year, on average, which signals a market-beating outlook in the upcoming years.

Can MSFT’s share price be justified by its earnings growth?

As Warren Buffett’s right-hand man Charlie Munger said, “No matter how wonderful a business is, it’s not worth an infinite price.” Microsoft is available at price-to-earnings ratio of 30.54x, showing us it is overvalued compared to the US market average ratio of 18.01x , and undervalued based on its latest annual earnings update compared to the Software average of 52.16x .

NasdaqGS:MSFT Price Estimation Relative to Market, July 13th 2019

We already know that MSFT appears to be undervalued based on its PE ratio, compared to the industry average. However, to properly examine the value of a high-growth stock such as Microsoft, we must reflect its earnings growth into the valuation. I find that the PEG ratio is simple yet effective for this exercise. A PE ratio of 30.54x and expected year-on-year earnings growth of 12% give Microsoft a quite high PEG ratio of 2.65x. This tells us that when we include its growth in our analysis Microsoft’s stock can be considered overvalued , based on its fundamentals.

What this means for you:

MSFT’s current overvaluation could signal a potential selling opportunity to reduce your exposure to the stock, or it you’re a potential investor, now may not be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:

1. Financial Health: Are MSFT’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
2. Past Track Record: Has MSFT been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of MSFT’s historicals for more clarity.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.

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