Should You Buy Microsoft After Its Record Quarter?
Back in September, I told you that Microsoft was a great stock to buy… But that you needed to wait to buy it.
And then in late October I told you why you needed to keep being patient enough to buy it…
Today, I give an update after it released new quarterly earnings and answer – Should You Buy Microsoft After Its Record Quarter?
You can read the past articles in full by using the links above…
But if you don’t want to; here’s a quick recap of what I said back then about avoiding it before we get to today’s update.
From Article #1 Linked Above
Microsoft’s 1% Dividend
Over the last decade Microsoft’s paid out a total of $12.90 per share in dividends.
At today’s share count of 7.683 billion shares that’s equal to $99.11 billion paid out to shareholders in the last decade.
Plus, in the last decade it grew its dividend 226% from $0.61 per share in 2010 to $1.99 per share now. This is an annual dividend growth rate on average of 22.6% per year.
It can do this because it earns huge profits and cash flows. Which is reason #2 to buy Microsoft to Depression Proof Your Portfolio.
Microsoft Earns Huge Profits
Over the last decade it earned an average operating income margin of 32.6% per year.
I look for anything above 10% on a consistent basis so MSFT surpasses this number.
Another way to show this is with its free cash flow to sales ratio (FCF/Sales). Over the last decade its 31.7% per year on average.
I call this the “Cash Machine” metric.
Microsoft surpasses my thresholds on both important metrics and that makes it an incredibly safe investment.
These profits also allow it to continually reinvest in operations. And to pay you a large and growing dividend as well.
But these profits also allow another layer of safety because Microsoft’s business is largely protected from negative effects of the coronavirus… Which is reason #3 to buy its stock.
The Coronavirus Won’t Harm Microsoft
People may stop paying their mortgages.
They may stop paying their credit cards.
They may stop paying their vehicle loans.
And they may stop paying their student loans.
Because of the mass unemployment caused economic issues we’re now dealing with people may stop paying these things if they need to.
But people and businesses won’t stop using Microsoft’s products and services to work and do everyday tasks.
This shows the power of the company and its ability to survive and thrive during this pandemic… No matter how long it lasts.
But what do these profits and cash flows mean for Microsoft’s debt levels?
Microsoft Has Low Debt
As of this writing its debt-to-equity ratio is 0.57.
I look to buy companies that have a debt to equity below 1.
Because the lower debt levels the company has, the lower chance it has of going bankrupt. And this makes it a safer investment.
And its total liabilities as a percentage of its balance sheet is only 60.7%.
Because of Microsoft’s continued fantastic profits and cash flow its able to have ultra-low debt levels. And this makes investing in its stock even safer.
But what about its valuation? Is it cheap?
Microsoft IS NOT Cheap
This is the only reason to avoid its stock…
With the markets at or near all-time highs you’d expect a fantastic stock like Microsoft to be selling at an enormous valuation.
And it is.
As of this writing its P/E is 29.8.
Its P/CF is 27.1.
And its forward P/E is 32.8.
On all three metrics I look to buy investments below 20 to consider them undervalued.
This means, at its current valuations that Microsoft is overvalued by a large amount.
And this means investing in its stock today gives you no margin of safety in investing terminology.
When you invest in stocks that have a margin of safety it makes the investment safer. And it also means you should expect to earn higher returns owning its stock in the coming years.
The inverse of this is also true…
When you invest in a stock without a margin of safety it makes the investment riskier. And it also means you should expect to earn less owning its stock going forward.
If you’re looking for a solid, safe, stable, dividend paying, cheap, and enormously profitable investment to Depression Proof Your Portfolio – consider investing in Microsoft. But only when it’s cheaper.
From Article #2 Linked Above
This thesis to avoid Microsoft until it’s cheaper continued playing out after it released its most up to date quarterly earnings on October 27th, 2020.
- Revenue rose 12% in the year-to-year quarterly period to $37.2 billion.
- Operating income rose 25% in the year-to-year quarterly period to $15.9 billion.
- And earnings per share rose 32% in the year-to-year quarterly period to $1.82 per share.
Since I last told you about Microsoft in early September its share price has continued to rise along with its profits.
Which means it’s still overvalued… Actually, even more so than the last time I told you about them.
Its P/E is now 37.
Its current P/CF is 27.
And its forward P/E is 32.4.
This thesis to avoid Microsoft continued to play out after it released it most up to date quarterly earnings on January 26th 2021… Sort of.
- Quarterly revenue grew 17% to a record $43.1 billion.
- Quarterly operating profit grew 29% to a record $17.9 billion.
- Quarterly net profit grew 33% to a record $15.5 billion.
- And quarterly earnings per share grew 34% to $2.03 per share.
These record results caused Microsoft shares to hit an all time high of $242.64 per share during intraday trading on January 29th, 2021.
This is all great for Microsoft shareholders… So why am I saying sort of above?
Because unfortunately even though its profits rose a lot… So has its share price – this makes it still too expensive to buy new Microsoft shares.
Its P/E is 35.7.
Its P/CF is 26.9.
And its forward P/E is 32.7.
Meaning its about as overvalued as it was back in October when I told you to keep avoiding its stock. And more overvalued than back in September when I first told you to wait to buy it.
If you own Microsoft shares already, I would continue holding… But if you’re looking to buy new shares of it you should wait due to this overvaluation.
Because if you buy stocks that are overvalued it means you should expect to earn lower returns with new investments in it going forward.
And it also makes the stock riskier because if there is any problem with either Microsoft or the overall market – even a small one – overvalued stocks fall farther and faster than undervalued stocks.
Microsoft itself is overvalued as I showed above.
And the general market is the 2nd most overvalued its ever been.
Because of these things if there are problems in either – Microsoft stock will fall which of course will give you a loss.
Instead of buying now that and dealing with that, wait to buy more Microsoft shares until after this happens and it becomes cheap enough to buy.
If you wait to do this, you’ll earn higher returns.
None of this means I think Microsoft stock will crash by 75% or implode… it won’t. It will keep doing great.
You just need to stay patient enough to buy new shares until its cheap enough.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.