We all know MSFT stock. This is mainly an academic exercise on share price valuation. Remember, the past is like a rearview mirror and future is in unpredictable. It is based on certain assumptions and analyst consensus on earnings by Factset or Refinitive IBES. The future events like new president, taxes, rate of interest, China trade war, disaster, new wave of pandemic etc. can impact stocks as well as overall market & economy.
Before we dive let’s review few facts about MSFT:
- MSFT has high quality earnings
- Rock solid balance sheet n huge cash
- MSFT’s earnings have grown significantly by 27.5% per year over the past 5 years.
- 1 year return is greater than 50%
- Earnings are forecast to grow 10.79% per year
- 1% Dividend; pay out ratio is 35% of earnings
Now let’s talk about the price of MSFT stock. As I mentioned, there are two school of thoughts:
- Earnings (EPS)/Economic Profitability (EVA i.e one of the most stringent metrics)
- Sales Growth/Revenue/ARR
Both are right in their own way. The second is suitable for modern/momentum companies that are not profitable such as DOCU, ROKU, AYX, FSLY, TDD, SHOP etc. Main thing is that both metrics focus on money that company is able to generate thru revenue (money coming in). One focuses on profits and the other on revenue with assumption profits will come in the future.
This is where ratios come into the picture. So for Microsoft we will use PE ratio (stock price to earnings).
Price of Stock = PE Ratio x EPS
EPS is earnings per share.
Facts:
- Current PE ratio (36.31) is below the Software industry average (52.6x)
- Or in other words, MSFT is good value based on its PE Ratio (36.31) compared to the US Software industry average (52.6x).
Current Market Conditions with HighTech:
Most high tech stocks are already overvalued. This is true for MSFT also. Fair Market Value is a complex financial calculation with terminal value etc. but various apps n websites does that job for us:
Here is MSFT returns over last 5 years. Of course, there is no point to keep cash in bank and snooze! You lose money vs. a robust stock .
The above return don’t include dividends. The yield 1% is less now as share price has gone up vs. past. MSFT pays out 35% of earnings.
We will focus on 2022 for this exercise. Based on past earning trends and analysis here is the revenue and EPS projections:
So the key question is “what will be earnings in 2022”. MSFT Fiscal Year runs from July to June. So our focus is end of June 2022. Here is the chart:
I thought to also verify this on web/another tool:
Good stocks mostly surprises the street pleasantly. MSFT too. So we will not take $7.301 or $7.34 EPS (Earnings per share). Let’s get ahead a bit and consider $8 as EPS.
The current PE is 36.31.
Based on market conditions/events/new President (or maverick Trump n China war), this could be 33 (tax rate or interest rate is higher than now) or 38 (bull market).
So based on facts and assumptions:
MSFT share prices in 2022
= 33×8 = $264
= 38×8 = $304
Let’s say if earning is 7.75 and PE is 35
Then MSFT will be $271.25.
Therefore, low side $264 and high side $304.
Plus dividends each quarter.
Now this may not look significant.
Why? Because stock price today is $211.29.
We see gain of $53 to $93 plus dividends from here ($211). This is a solid gain 25%-44% in less than 2 years (20 months)! Plus of course dividends as sweetener!
Also you are correct that the stock is bit expensive now or overvalued! Just 2 days back, on Tuesday this week, you could have snatched MSFT for just $202!! Well, that’s why saying goes, buy during dips!!
Overall MSFT is a great investment that cannot go wrong!! Of course usual risks if you are an investor in the market! Here is the beautiful snowflake chart for MSFT:
Happy Investing!!
Buy good stocks!
Sleep good!!
Be healthy n happy.
Enjoy life!
