Long-term Microsoft Shareholders Your Money May Be in Jeopardy

Introduction

Microsoft (MSFT) reported strong 4th quarter and fiscal year 2018 earnings.  The company’s earnings per share beat the analyst estimates by $.05 and their revenue of $30.09 billion beat analyst estimates by $860 million.  All in all, it was a great quarter and investors initially responded positively in after-hours trading.

Clearly, there was an awful lot to like about the quarter with many segments producing extraordinary growth and positive performance.  Nevertheless, despite all the positive results and good news surrounding the company and its largest quarter of the year, I consider the company’s stock dangerously overpriced.  However, I would also add that I really like Microsoft the business and its prospects for growth going forward.  In other words, what I don’t like about Microsoft’s stock price today has little to do about the company and everything to do about the way I believe the market is irrationally pricing the stock.

The Numbers Don’t Lie

Since the beginning of calendar year 2013 Microsoft has been one of the best performing stocks in the market.  On December 31, 2012 Microsoft’s price was $26.71 and its P/E ratio was 9.8.  However, as of yesterday’s close Microsoft’s price was $104.40 and its blended P/E ratio is 27.2.  To put that into perspective, Microsoft’s stock price has increased almost fourfold and its P/E ratio has almost tripled.  Additionally, non-GAAP earnings came in at $3.88 exceeding consensus estimates of $3.83 by $.05 per share.  Likewise, diluted earnings (GAAP) came in at $2.13 versus consensus estimates of $2.06.

Regardless of these great results, I consider Microsoft a dangerously overvalued stock for the long-term prudent investor.  My reasoning is simple and straightforward, Microsoft’s results do not support the high multiple that the market is currently placing on the shares, nor does it support the multiples that the market has been applying over the last several years.

In short, Microsoft has recently been a momentum stock which has been great for active traders in recent years.  On the other hand, an overvalued momentum stock like Microsoft is today can be very dangerous to prudent long-term investors.  It is my opinion, and history supports it, that the company’s stock price will inevitably move into alignment with the company’s intrinsic value.  My current optimistic assessment of Microsoft’s intrinsic value would be between $68-$70 per share.  Mathematically, this would indicate that Microsoft’s stock price is 35 to 40% overvalued.

In the following FAST Graph analyze out loud video I will clearly and vividly illustrate how and why I believe Microsoft’s stock price is overvalued despite its excellent results.  As I’ve often stated, measuring performance without simultaneously measuring valuation is a job half done.  This simply means that it is very easy to become enamored by a stock that has been performing well.  Everybody loves it when their stock is rising in value.  However, prudence dictates that it is very important to keep the company’s stock value in perspective to the company’s intrinsic value.

Summary and Conclusions

In Conclusion, I really like the business results that Microsoft has recently generated.  Considering that the company is an $800 billion Goliath, recent historical operating earnings growth between 8 and 10% is nothing short of extraordinary.  Moreover, I am also very impressed that the consensus of leading analysts expects Microsoft to generate double-digit earnings growth over the next 3 to 5 years.  If AAA rated Microsoft achieves these growth forecasts, it would be nothing short of extraordinary.

Nevertheless, as a prudent investor it’s critically important to recognize – within reason at least – whether the investment in a given stock makes economic sense.  Despite all these impressive results, I do not believe that an investment in Microsoft makes economic sense today.  In other words, I do not think it’s a good buy at its current quotations.  If I was a long-term shareholder I would at least consider taking some of my investment off the table.

In closing, I would really love to have Microsoft in my portfolio as a long-term position.  However, I believe the market is applying too high a valuation for me to even consider investing in this great business.  So, to be clear, I love the company but I hate the valuation I would have to pay to be able to invest in it.

Disclosure:  No position at the time of writing.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

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1 thought on “Long-term Microsoft Shareholders Your Money May Be in Jeopardy

  • Thanks for confirming my actions. Bought Sept. 2013, sold half in April 2018 then the balance in June 2018. When the PE got so high and all of the “talk” of a serious market correction I started to reduce my exposure in high PE stocks.

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