After being dragged down by the software sell-off earlier in the year, Microsoft’s (NASDAQ: MSFT) share price has staged a huge comeback recently. Since late March, it has surged from $355 to near $430.
Yet I don’t think it’s too late to consider buying the Magnificent 7 stock at current levels. In my view, it still offers value today.
An attractive valuation
Microsoft’s financial year (FY26) ends on 30 June. So, FY27 isn’t far off.
Now, for FY27, analysts expect the tech powerhouse to generate earnings per share of $19.40. So, we have a forward-looking price-to-earnings (P/E) ratio of about 22 today (the ratio was in the 30s not so long ago).
Plenty of growth potential
To my mind, that’s a very reasonable valuation for this business, because Microsoft could still generate a lot of growth in the coming years.
The key growth driver is its cloud computing division. Last quarter, cloud revenue amounted to $54.5bn, up 29% year on year.
Looking ahead, I expect this division to get significantly bigger over time as the world becomes more digital. Note that Goldman Sachs expects global cloud computing industry revenues to grow at an annualised rate of 22% between 2024 and 2030.
One growth wildcard for Microsoft could be its AI chips. Recently, there have been some reports that Anthropic is talking to the company about a chip deal (I speculated that Microsoft could focus more on AI chips last month here).
Quality financials
This stock isn’t just about growth though. It’s also about quality, which is one thing I always look for when investing in individual companies.
This is a business with a fortress balance sheet and a very high return on capital employed. ROCE as it’s known is a key measure of profitability.
It’s also a reliable dividend payer and consistently increases its payout, as well as doing share buybacks. So, there’s a lot to like from an investment perspective.
This quality is another reason I can justify the valuation. Generally speaking, high-quality stocks warrant higher valuations because they tend to be good performers over the long run.
What are the risks?
Of course, there are no guarantees that Microsoft will turn out to be a good investment from here. AI is a risk for the business if a ton of white collar workers get laid off in the years ahead, Microsoft’s software revenues could struggle.
Competition from the likes of Amazon and Alphabet in the cloud computing space is another risk to be aware of. This is a very competitive industry.
An attractive set-up
Overall though, I like the risk/reward proposition on offer at the moment. In my view, the shares are worth considering.
II’ll point out that the average analyst price target is $565 – about 30% above the current share price. It’s also worth noting that legendary value investor Bill Ackman has been buying the stock recently.
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Edward Sheldon owns shares in Microsoft, Amazon, and Alphabet
