Posted on February 25, 2025, by Niftynews
Analyzing the Pros and Cons of Microsoft Stock at Its Current Valuation
Microsoft (NASDAQ: MSFT) has seen some movement recently, and with its current Microsoft stock price hovering around $400, many investors are questioning whether the Microsoft stock is too expensive to buy. Recently, the company’s decision to cancel certain leases for its U.S. data center space has raised questions about its long-term need for AI computing capacity. However, despite this news, Microsoft is moving forward with an $80 billion capital expenditure plan, part of which will go into building new data centers specifically designed to support AI workloads.
As of today, MSFT stock is trading 1% lower than last week, but at $400 per share, it remains a volatile but potentially attractive option for some investors. But is this Microsoft stock truly a good buy at such a high valuation? Let’s break down the company’s performance across key metrics and evaluate whether it’s worth the investment.
Microsoft Stock Valuation: Too Expensive?
When comparing Microsoft to the broader market, its current valuation appears quite high, suggesting that the stock could be overpriced.
- Price-to-Sales (P/S) Ratio: Microsoft stock has a P/S ratio of 11.8, which is significantly higher than the S&P 500’s ratio of 3.1.
- Price-to-Operating Income (P/EBIT) Ratio: Microsoft stock stands at 26.2, compared to 24.4 for the S&P 500.
- Price-to-Earnings (P/E) Ratio: Microsoft’s P/E ratio is 24.5, slightly higher than the benchmark’s 24.4.
Given these high ratios, Microsoft stock is definitely more expensive relative to the broader market. But what does that mean for the company’s growth potential?
Microsoft Revenue Growth
One of the driving forces behind Microsoft stock‘s high valuation is its impressive growth over the past few years. The company’s revenue has increased significantly, outpacing the S&P 500:
- Average Annual Revenue Growth: Microsoft stock has seen a 13.5% growth in revenue over the last 3 years, compared to the 9.8% growth seen across the S&P 500.
- Recent Revenue Growth: In the last 12 months, Microsoft’s revenue increased 15% from $228 billion to $262 billion, surpassing the 5.6% increase in the broader market.
- Quarterly Revenue Growth: Microsoft’s quarterly revenue grew by 12.3% to $70 billion, up from $62 billion a year ago, again exceeding the 7.2% growth seen in the S&P 500.
These numbers illustrate that Microsoft stock is performing well in terms of revenue generation, and its growth is stronger than the broader market.
Profitability and Financial Stability
Microsoft’s profitability metrics are stellar, further justifying its high stock price despite the seemingly steep valuation.
- Operating Income: Microsoft stock posted an operating income of $118 billion, reflecting a solid operating margin of 45%—significantly higher than the S&P 500’s average of 12.6%.
- Operating Cash Flow (OCF): Microsoft generated $126 billion in operating cash flow, resulting in an OCF-to-Sales ratio of 48%. This is more than three times higher than the 14.4% ratio for the broader market.
In terms of financial stability, Microsoft balance sheet is solid, with a debt-to-equity ratio of just 2%, far below the S&P 500’s average of 19.7%. This indicates that Microsoft has minimal financial risk and a strong position to weather economic downturns.
Resilience During Economic Downturns
Microsoft stock has proven resilient during past market downturns. Let’s look at how MSFT fared during major recessions:
- COVID-19 Recession (2020): MSFT stock fell 28% from February to March 2020, but it fully recovered by June 2020, taking just 84 days to return to pre-crisis levels. The S&P 500 took 148 days.
- Great Recession (2007-2009): MSFT stock dropped 57.9% during the 2007-2009 recession but fully recovered by 2013, although it took longer than the S&P 500’s recovery time.
This resilience during past downturns suggests that MSFT stock is relatively safer than other stocks in volatile market conditions.
Conclusion: Is Microsoft Stock Worth the Risk?
After evaluating Microsoft growth, profitability, financial stability, and resilience during downturns, we conclude that while the stock is highly valued at $400, it is not necessarily overpriced. Its strong performance and robust financial health support the high valuation. However, investors should be cautious, as the stock is still susceptible to volatility due to its elevated valuation and the ever-changing dynamics of the tech market.
For investors who can stomach the volatility, Microsoft stock represents a strong long-term play. But for those seeking a safer bet with lower risk, it might be worth considering alternative investment options.
Ultimately, Microsoft stock remains an attractive but tricky investment.
