Tech stocks like Microsoft (NASDAQ:MSFT) have declined by huge margins this year. With its share price down more than 25% this year, the stock could be trading on a discount today. So, here’s what the charts say.
Softening numbers?
Having hit an all-time high of $343 during the pandemic, Microsoft stock has since dropped to $242. Fears of a recession have dented demand for its products and services. Nonetheless, it’s worth noting that its operating and profit margins have held up relatively well.
Data source: YCharts
What impresses me most is its ability to keep its operating margins above 40%, despite higher costs associated with energy and labour this year. Although margins have dipped against 2021 levels, it’s commendable that they’ve remained above their pre-pandemic levels. This is always the first signs of a good investment for me — strong margins.
But is Microsoft stock fairly priced? Well, its shares currently trade at a price-to-earnings (P/E) ratio of 26. This is more than the S&P 500‘s average P/E of 21, which could indicate that the stock lies on the pricier side.
Data source: YCharts
A blizzard of regulation
It’s worth noting, however, that the P/E ratio is a lagging indicator. A more accurate way to value Microsoft would be to look at its forward P/E. This takes its forecast future earnings into consideration. With a forward P/E of 21, it can be said that I’m paying a fair value for future earnings growth within a year. On the flip side though, the tech stock’s forward price-to-earnings (PEG) ratio stands at a whopping 6.9; way above the ‘acceptable’ threshold of 1.
Data source: YCharts
The bulk of the conglomerate’s growth has been coming from its cloud offerings, especially in recent times. This is expected to continue growing along with its hopeful acquisition of Activision Blizzard, which should help its top and bottom line grow over the long term. However, the move has come to a bit of a halt in recent weeks as authorities question whether the merger would break anti-competition laws.
Window of opportunity?
Having said that, Microsoft has a steady and excellent track record of producing large returns for shareholders. Moreover, this has increased over the years. Looking at the company’s return on assets, equity, and capital employed, there’s clearly a distinction to be made. In fact, the company outperforms many of its cloud peers by massive margins.
Data source: YCharts
Pair this with its immaculate balance sheet and the stock looks even more attractive. With very little debt, the auto manufacturer has more than sufficient capital to weather a global recession.
Data source: YCharts
What’s more, the group continues to grow its market share in the cloud space, which goes to show how well it’s doing despite the tough economic environment. Not to mention, in a world that’s becoming increasingly digital and with cloud computing expanding rapidly, Microsoft is well positioned to capitalise.
Overall, I think Microsoft stock is fairly valued at its current price. After all, analysts rate the stock a ‘strong buy’ with an average price target of $291. This would present me with roughly a 21% upside from current levels. But due to the red tape surrounding the acquisition of Activision, I’ll be holding off buying any shares until the landscape becomes clearer.
The post Is Microsoft stock a cheap buy? Here’s what the charts say appeared first on The Motley Fool UK.
6 shares that we think could be the biggest winners of the stock market crash
The hotshot analysts at The Motley Fool UK’s flagship share-tipping service Share Advisor have just unveiled what they think could be the six best buys for investors right now.
And while timing isn’t everything, the average return of their previous stock picks shows that it could pay to get in early on their best ideas – particularly in this current climate!
What’s more, all six ‘Best Buys Now’ are available to access right now, in just a few clicks.
Learn more
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
})()
More reading
4 of the best dividend stocks out there
2 passive income stocks for Stocks & Shares ISA investors in 2023!
Why I’d buy GSK shares in 2023
Can this FTSE 100 luxury stock yield me big gains in 2023?
Should I buy a FTSE 100 tracker fund for 2023?
Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. John Choong has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Microsoft. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.