Are Microsoft Shares Overvalued? |

Investor urge for food for Microsoft (NASDAQ:) inventory stays sturdy. During the previous 12 months, each dip has attracted extra patrons, pushing the software program and infrastructure big’s inventory to a brand new excessive.

Even after a 125% rally because the market crash in March 2020, there are causes to imagine the inventory has extra upside. The Redmond, Washington-based firm final month gross sales and revenue that exceeded analyst estimates for a 10th straight quarter, displaying that Chief Executive Officer Satya Nadella’s technique to make Microsoft the biggest cloud-computing supplier stays on observe.

Microsoft Weekly Chart.

Microsoft’s cloud-computing business has contributed massively to the inventory’s 425% advance prior to now 5 years—a interval by which Nadella additionally branched out into further new progress areas. During his tenure, greater than $45 billion was spent on buying corporations, together with business social community LinkedIn, video game builders Mojang and Zenimax, and the code-storage service GitHub.

These bets have largely paid off. Microsoft’s Intelligent Cloud phase accounted for 33.8% of the corporate’s 2020 income, making it the biggest of the technology behemoth’s main business traces for the primary time. As nicely, the unit was up from 31% in 2019.

Last 12 months, the division confirmed income progress of 24%, in contrast with the 13% progress in Productivity and Business Processes, and the 6% progress of Microsoft’s More Personal Computing unit.

In addition, the pandemic has additional accelerated MSFT progress. Millions of employees and college students caught at dwelling throughout lockdowns used the corporate’s assembly software program Teams to stay in contact and related. As nicely, massive company purchasers accelerated their shift to the cloud, whereas youthful retail clients purchased Xbox gaming subscriptions.

More Upside In Store

Still, the relentless rally over the previous 5 years doubtless raises a query in traders’ minds: Is MSFT inventory too costly to purchase?

Most analysts imagine that the comparatively costly share value appropriately displays expectations for the corporate’s progress. In a be aware to its purchasers yesterday, Goldman Sachs reiterated its purchase name for Microsoft, saying the financial institution sees extra upside within the inventory after the tech big introduced a value improve for Microsoft 365.

Its be aware mentioned:

“We believe the recent announcement underscores the company’s strong competitive positioning and long-term pricing power, particularly with respect to Commercial Office 365, which represented ~18% of total revenue in FY21.”

In its first “substantive” price change since launching Office 365 a decade in the past, Microsoft mentioned in a blog post final week that the worth for its 365 Business Basic plan will bounce 20% to $6 per person, whereas the high-end model of the suite will see a bump to $36 per person from $32.

Microsoft justified the transfer by highlighting three key areas the place its merchandise have superior: communication and collaboration, safety and compliance, and AI and automation. The firm additionally introduced it’s including limitless dial-in capabilities for Teams, to permit customers to affix in to conferences from just about any gadget no matter location.

Just like Goldman Sachs, Mizuho Bank additionally reiterated its purchase for MSFT. In a be aware to purchasers, the Japanese lender raised its value goal on the inventory to $350 from $325, saying the Microsoft 365 value hike may have a “significant” impact in FY23 and past.

These bullish sentiments are additionally mirrored in’s consensus value goal for the inventory. Of 36 analysts polled, 34 have an “outperform” score for Microsoft, with a few 9% upside from its present value.


Bottom Line

Shares of Microsoft, after a powerful rally this year, have indeed become expensive. But in our view, the stock isn’t overvalued.

The current share price of $304.65 as of Monday’s close, takes into consideration Microsoft’s success in both the short- and longer-term. In addition, Microsoft pays a healthy dividend of $2.24 annually that continues growing steadily. That makes owning the stock even more attractive.

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