Is it the time to sell Microsoft?

Microsoft Corp is the largest public company in the world at the current moment. The company`s name is associated with the benchmark of reliability, stability and growth sustainability. MSFT stocks are up more than 60% over the past year. The 5-year return of it is incredible: your investment would have been tripled if you had bought the stock before 2020!

The business itself is still great, but is it worth such a price?
Let’s take a look at the key financial indicators of the latest report for the period ended 31 December 2023. By the way, this is actually report for Q2 2024 because Microsoft`s financial year begins in July!

MSFT ended the quarter with record revenue above $62 bln. Net income is $21.9 bln and net profit margin is still incredible high for a such mature company — 36% (TTM).

It’s important to note that these are high quality earnings confirmed by operating cash flow. Actual flow of cash into the company`s account exceeded the accrued profit by 24% (for the last twelve months).

Microsoft Corp is still borrowing little relative to shareholders equity and all debt burden indicators are in safety zone. This usually increases the security of the investments in such equities.

Debt/Ratio is less than 0.5, Current ratio is higher than 1.5. It is kind of ideal perfomance by managment of the company.

Even though the debt has increased slightly over the past 6 months. The same can be said about the return on equity and invested capital. These values have been consistently above 20% for many years.
Current ROE is 41%!

If there is something negative about investing in MSFT? Yeah it is the price of the stock. At the current moment is is above $400 and it means that P/E ratio is allmost 38! This is not so much compared to NVIDIA Corp (NVDA), which is now worth 95 annual profits (!), but Microsoft has never been rated so highly for the last 60 months. We think artificial intelligence is a hot topic right now, and it’s definitely impacting tech company valuations.
What does it mean?

Accordind to our valuation model it is the best time to invest in the company`s shares when it valuated at mininal levels of P/E like it was in the end of 2022. Now minimum P/E equals 25. When a stock is trading around the yellow line — it is an averege valuation level — we call it fair valued. But now MSFT is overvalued because the price is above the maximum historical valuation level. It means tha investing in MSFT right now is a great risk and «opportunity» to witness a price drawdown in a short term. So maybe it is better to find out another company to invest. CRM, CSCO or NOW seem relatively cheaper than overheated Microsoft.

Take care of yourself and your money
Eyestock Team