Microsoft (MSFT) Stock Is Worth the Relatively High Price


Warren Buffett once said, “Only when the tide goes out do you discover who has been swimming naked.” With the tide having gone out on the tech industry, we can see that Microsoft (NASDAQ:MSFT) and Microsoft stock were fully clothed.

Although Microsoft stock now has a higher valuation than other longtime tech giants, at current levels, MSFT gives investors value, growth, and stability.

Microsoft Stock Offers Stability And High Growth

As one of the few tech companies with a AAA credit rating, Microsoft has built a reputation for resilience. The most recent downturn has proven that Microsoft stock is indeed resilient. The Invesco QQQ Trust (NASDAQ:QQQ), which tracks the Nasdaq 100, has fallen by 17.5% since early October. However, over the same period, Microsoft stock has decreased by only 13%.

Not only did MSFT stock reaffirm its reputation for stability, but it also became the top-performing Dow 30 stock of 2018. It also regained the title of world’s largest market cap from its longtime rival, Apple (NASDAQ:AAPL).

Today, Apple and Microsoft only compete head-to-head in the PC business. Microsoft failed to compete in the phone market, while Apple has not meaningfully entered the cloud-infrastructure market dominated by Microsoft and Amazon (NASDAQ:AMZN) .

Nonetheless, AAPL and MSFT remain rivals, and the battle for top market cap will continue. Between two rivals, the shares of the company that falls behind tend to be the better investment. For this reason, I would recommend AAPL over MSFT stock at this moment, even after Apple lowered its revenue guidance.

MSFT Offers Double-Digit Revenue Growth

Despite my feelings, I don’t oppose buying MSFT stock. Not everything that Microsoft has tried has been successful. Still, Microsoft has become the fastest-growing player in the cloud, which is the fastest-growing tech niche. The revenue of its cloud-computing platform, Azure, surged 89%, and the top-line of its AI-enabled Intelligent Cloud business increased by 23% in the company’s last fiscal year.

Even its weaker legacy divisions now generate double-digit percentage growth. The revenue of the Productivity and Business Processes unit, which includes Office 365, increased 13% last year. Also, the PC-focused More Personal Computing division reported top-line growth of 17%.

Investors should also take note of Microsoft’s rock-solid balance sheet. Although it held $69.7 billion of long-term debt as of the end of Q3, its AAA credit rating enables it to pay lower interest rates. Moreover, since MSFT has almost $135.9 billion of cash, its balance sheet is quite strong.

Don’t Forget the Discounted Valuation of Microsoft Stock

Investors should also consider the relatively low valuation of Microsoft stock. The stock’s forward price-earnings ratio currently stands at about 23.4. As a more value-oriented investor, I would generally consider that on the high side for a company that’s expecting 13.7% average annual income growth over the next five years.

Microsoft’s forward PE is close to double Apple’s forward PE of 12.1. However, considering the stability of Microsoft stock, I would pay a higher multiple for MSFT. Investors should also note that the stock’s PE multiple is below its five-year average of 33.2.

Even if the tech selloff continues well into 2019, I do not expect the PE ratio of Microsoft stock to fall to the mid-teens- and-lower levels that it reached during the last years of the Steve Ballmer era. If Microsoft stock somehow becomes that cheap, investors should buy MSFT stock hand-over-fist.

The Bottom Line on Microsoft Stock

Although Microsoft stock trades at a premium compared to other longtime tech giants, its growth rates and stability make the company a worthwhile investment.

As I mentioned earlier, usually, between two rivals, the one that has fallen behind is the more attractive investment. So AAPL stock could wind up being more profitable than MSFT. Still, there aren’t many other reasons to avoid Microsoft stock at this point.

In fact, for investors who want shares of the fastest-growing company in the fastest-growing segment of tech, Microsoft stock is not only the best choice, it is the only choice.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.


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