Microsoft Analysis: Buy or Sell?



What is Microsoft?

Microsoft (MSFT) is a computer & software multinational company that creates tech products and services. It is one of the largest technology companies in the world with a market capitalisation of 2.51 trillion US dollars. (Apple’s market cap is 3 trillion USD.


Microsoft makes up 6.48%($2.51T / $38.73T) of the 500 biggest companies in the United States, aka S&P 500 Index.

Microsoft’s Mission Statement


“Our mission is to empower every person and every organisation on the planet to achieve more.” - Microsoft Corp


Back in the 1990s, only the big corporations had access to softwares that could perform excel-like functions.


When Bill Gates created Microsoft Word, Excel, and Powerpoint, Gates really went the extra mile and levelled the playing field for small medium enterprises to have the same level of computing power as large corporations.


What Gates created was truly empowering, and he proved that small companies can also perform the same if not better than large corporations.


Comparison with Competitors

Microsoft’s biggest and direct competitors are Apple Inc(AAPL), International Business Machines (commonly known as IBM), and Alphabet Inc (commonly known as Google or GOOGL).


To understand more of how Microsoft is performing compared to its competitors, it is useful to look at all companies’ financial metrics and ratios.

Return and Opportunity Cost Analysis


Price to Sales

The price-to-sales ratio shows how much the market values every dollar of the company's sales.


This ratio can be effective in valuing growth stocks that have yet to turn a profit or have suffered a temporary setback.


The lower the P/S ratio, the more attractive the investment. Price-to-sales provides a useful measure for sizing up stocks.


Price to Sales Ratio (past 12 months)MSFTAAPLIBMGOOGL14.758.271.508.42


Microsoft is the least attractive pick from the P/S ratio point of view as it is overvalued compared to Apple and Google. The most attractive investment here is IBM.


Trailing P/E Ratio


The PE ratio places a price tag on a company, to see whether it's cheap or expensive when compared to its competitors that operate in the same sector.


The PE ratio is calculated by dividing the current market value, or share price, by the earnings per share over the previous 12 months.


Looking at a company’s PE ratio is meaningless. It is useful when the PE ratio is compared with its peers.


Price to Earnings Ratio (past 12 months)MSFTAAPLIBMGOOGL38.3231.9923.9628.53


Looking at Microsoft’s PE ratio, it is significantly higher than its peers. This means that it is significantly overvalued at the moment.


Return on Equity (ROE)

Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders' equity.


ROE gauges a corporation’s profitability and its efficiency and ability of generating profits.


ROE (past 12 months)MSFTAAPLIBMGOOGL49.30%147.44%21.41%30.87%


Microsoft has the second highest ROE when compared to its peers. It’s ability and efficiency at generating profits provides a positive buy signal.

Risk Assessment

What is Beta?

Beta is a measure of a stock's correlation to the overall market.


For example, the S&P 500 Index is the benchmark measurement of the US overall market. US stock’s beta are measured by how much their price swings in relation to the S&P 500 Index.


Beta (using 5 Years of historical data commonly known as “5Y”)MSFTAAPLIBMGOOGL0.861.201.131.06


Microsoft has a lower beta compared to its peers, which means that investors will expect Microsoft to have lower returns.


Low beta stocks are expected to drive lower returns but have reduced market risk. Beta is useful for short-term risk assessments. If I purchase a stock of Microsoft now, my risk exposure is limited.

Current Ratio

The current ratio is a liquidity ratio that measures a company’s ability to pay short-term obligations due within one year.


If a company has a very high current ratio compared with its peer group, it indicates that management may not be using its assets efficiently.



Current Ratio (2021 Quarter 4)MSFTAAPLIBMGOOGL2.161.080.842.98


Microsoft and Apple are the only companies that fall within a healthy range. IBM appears to be in slight liquidity distress and Google appears to be not utilising its assets efficiently.


Observing the current ratio of Microsoft provides another positive buy signal for investors. However, it is important to assess Microsoft’s future projections upon conclusion.

Future Projections


Retention rate

The retention rate is the percentage of profits that are reinvested into the company for future research and development.


Retention rate is calculated by = (1 - payout ratio)


A company with a higher retention rate implies that they are confident and aggressive in investing in their future research and developments.


Retention rate MSFTAAPLIBMGOOGL74.94%84.85%-26.25%0.00%


Although Google is reinvesting 100% of their profits for future growth, it doesn’t mean that Microsoft will lose its competitive edge in the long-run.


Microsoft’s 2021 retention rate is at a healthy range where they can attract capital and yet ensure sustainable long-term growth.


A healthy range of retention rate depends on which industry you’re analysing. High retention ratio is very commonly seen for tech companies and the healthy range is approximately 60-100%.

Sustainability Analysis (Long-run)

It is important to look at Microsoft’s environment, social, and governance (ESG) risk when assessing their long-term sustainability.


More and more corporations are emphasising on reducing their environment, social, and governance (ESG) risks, and trying to become a carbon positive corporation.


From Sustainalytics, Microsoft’s ESG risk is “LOW” and their management has strong and robust systems that promote sustainable business practises.

ESG Rating

Microsoft’s ESG risk ranks at 21st out of 996 companies within the software and services industry.


Environment Risk ScoreSocial Risk ScoreGovernance Risk Score0.58.14.7


Despite the fact that Microsoft is producing a lot of computers and hardwares, their environment risk score is surprisingly low.


In essence, Microsoft’s ESG rating and risk level is at a healthy range, to which is a positive buy signal.


Conclusion


To conclude our metrics, creating a table that highlights each category’s winner will help us determine if one should buy or sell Microsoft’s shares.


Financial Metric Assessment

P/S RatioPE RatioROEMSFTOvervalued Overvalued2nd highestAAPLFairOvervaluedHighest ROEIBMUndervaluedFair4thGOOGLFairFair3rd


From our financial metrics analysis of Microsoft, it appears that purchasing Microsoft shares at this moment is not a great time as it is overvalued as suggested by the P/S and PE ratio.


Furthermore, the ROE of Microsoft isn’t as rewarding as Apple Inc. This further suggests that putting Microsoft on the watchlist may be a smarter choice.


Risk Assessment

BetaCurrent RatioRetention RateMSFT0.862.1674.94%AAPL1.201.0884.85%IBM1.130.84-26.25%GOOGL1.062.980.00%


Through the risk measurement metrics, Microsoft still appears to be an attractive investment in the long haul. This statement is supported by it’s low beta value, healthy current ratio and retention rate.


Timing your investments is crucial but you can never find the perfect timing because there are always unexpected surprises.


Personally, I would place Microsoft into my close watch-list as data suggests it is still a sustainable and attractive long-term investment. When it is less overvalued relative to its peers, I think that would be a better timing of purchase.


This is a compressed methodology of what I would do before I invest. Not financial advice (aka NFA) and make sure to do your own research (aka DYOR). Invest at your own risk.


Would you buy or sell Microsoft shares at this moment?


Let me know down in the comments or DM me! Would love to hear and respond to your opinion.


If you enjoy these kinds of reads, please let me know your next topic choice by sending me a DM on Instagram (@Leinvests_)



41 views0 comments

Recent Posts

See All