Jason and Frank both purchased 100 share positions in Microsoft Corporation (MSFT) after its share price dropped 11% because of lower-than-expected earnings guidance. I wanted to chime in on my assessment of the company, and share why I think now is not the time to buy.

Let’s look at the company as a whole to get a picture of how it’s doing. I will be basing all my numbers on the financial data provided by my favorite research site, MSN Money.


5-year: 16.2%
1-year: 29.5%

Microsoft’s ROC (What is ROC?) for the last 5 years has been a decent 16.2% and the current year has seen ROC jump to 29.5%. This is exceptional, but it’s highly unlikely that a $239 billion company can sustain 29.5% returns for the future.

Growth Rates

Equity Sales EPS
5-year: 14.8%
3-year: 17.1%
1-year: 13.5%
5-year: 11.6%
3-year: 11.9%
1-year: 8%
5-year: 5.7%
3-year: 16.4%
1-year: 49.3%

The only number that pops out there is the 1-year EPS growth of 49.3%, which is largely due to a bad year last year, than this year being particularly good.

It looks like Microsoft is going to grow between 10% and 15% annually, and because I have faith in the company, I’ll estimate the future growth to be around 12%. Analysts expect an 11% future growth for the next 5 years, which is in the ballpark.

Although the historical PE has been around 30, I don’t think that’s sustainable for a company growing 12% a year. I think 24 is more likely. The PE is currently 18.4, compared with the industry 23.1. If it were to move up to my forecasted 24, you could expect to see a return of 30%.

But here’s the rub. For the last 3 years the stock has traded between $24 and $29, which is a good deal less than the $30.5 at a PE of 24.

Is the stock undervalued right now? In my opinion, yes. You could probably pick up 10% in the next 6-12 months. But I believe this stock is too risky for the potential reward. It seems to me that the market knows something I don’t and there’s not an adequate margin of safety to make it an attractive investment.