Is Microsoft Stock Overvalued?



MSFT’s returns

Technology stocks have had a stellar run in 2019 after burning investors’ cash last year. While the Technology Select Sector SPDR ETF (XLK) has risen 25% this year, the VanEck Vectors Semiconductor ETF (SMH) is up 33%.

But are the double-digit returns of several of these tech stocks a sign that the market is now overvalued?

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Technology heavyweight Microsoft (MSFT) has generated a return of 28.5% in the last 12 months. Since the start of 2019, the stock is up 19.4%. It’s risen 119% in the last three years and 203% in the last five years. This growth has been driven by a rise in the company’s sales. Its EPS have also risen at a CAGR (compound annual growth rate) of 13% in the last five years.

Microsoft stock is currently trading 0.72% below its 52-week high of $121.65 and 34% above its 52-week low of $90.28. With a relative strength index score of 67, Microsoft stock is trading close to overbought territory.

Is Microsoft overvalued?

Microsoft has a forward PE ratio of 27.4x for 2019. For 2020, this ratio is 24.2x. Analysts expect Microsoft’s sales to rise 12.4% in 2019 and 10.4% in 2020. Its EPS are expected to rise 14.2% in 2019 and 12.6% in 2020.

Its EPS could grow at a CAGR of 14.5% over the next five years. The stock looks overvalued even if we take into account its dividend yield of 1.5%.

Analysts’ recommendations

Of the 34 analysts covering Microsoft, 27 have given it “buy” recommendations, six have given it “hold” recommendations, and one has given it a “sell” recommendation. The average 12-month target price for Microsoft is $128.38, which indicates a potential upside of 6% from its current level.


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