Could Microsoft Stock Be Undervalued?

MSFT has climbed up by nearly 30% in 2021

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Microsoft Corporation (NASDAQ:MSFT) is one of the Big Five tech companies in the U.S., alongside Alphabet (GOOGL), Apple (AAPL), Amazon (AMZN), and Facebook (FB). Microsoft produces computer software, consumer electronics, personal computers, and related services. This afternoon, MSFT was last seen up 1% at $280.40, despite news breaking it will not be receiving the JEDI grant like it did in 2019.

On June 16, Microsoft announced that the board’s independent directors elected Satya Nadella to the role of board chair and elected John W. Thompson as lead independent director. The board also declared a quarterly dividend of $0.56 per share, payable on Sept. 9 to shareholders of record on Aug. 19. Microsoft stock currently has a forward dividend of $2.24 and a dividend yield of 0.81%.

Furthermore, Microsoft stock has increased by about 34% year-over-year, and remain well above its September 2020 bottom. Additionally, shares of MSFT have grown by 27.5% year-to-date and is fresh of today's record peak of $280.69.

Checking in on earnings, Microsoft has outperformed earnings expectations across the board on all four of its most quarterly earnings reports. For Q2 of 2020, MSFT beat analyst estimates by a margin of $0.12 and reported an earnings per share (EPS) of $1.46. For Q3 of 2020, Microsoft's EPS increased to $1.82, and beat expectations by a margin of $0.28. For Q4 of 2020, Microsoft reported another increase in earnings, rising to $2.03 per share and outperforming estimates by a margin of $0.39. For Q1 of 2021, MSFT reported an EPS of $2.03 and beat expectations by a margin of $0.25. Microsoft's next earnings date is slated for July 17.

From a fundamental perspective, Microsoft is a very well rounded company. MSFT has grown revenues by 48% since 2017. Microsoft also has an excellent balance sheet with $125 billion in cash and a relatively manageable $81.26 billion in debt. The only detail that could be considered a fundamental issue with Microsoft stock is its valuation. MSFT has a $2.09 billion market cap and a price-earnings ratio of 37.84, which would be considered high by most standards. However, Microsoft's long history of strong and consistent growth, coupled the stock’s forward price-earnings ratio of 33.33, suggests that Microsoft stock may still be undervalued.


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