Long-term Microsoft Shareholders Your Money May Be in Jeopardy


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.