Why I DON'T Buy or Own Microsoft Now & When To Buy?

$Microsoft(MSFT)$

While the S&P 500 is down only about 3% from its all-time high, many growth stocks have taken significant hits, dropping 20%, 30%, 40%, or even 50%. Even major companies like Alphabet are trading at roughly 18 times earnings, while stocks like Amazon and others have also seen substantial declines. Personally, I've been taking advantage of many of these opportunities.

However, there's one stock I've been watching for over a year—one I've always wanted to own. I'm a big fan of the company, love its business model, and recognize its strong competitive advantage. But despite all that, I just can’t bring myself to buy it. That stock is Microsoft.

Microsoft has been stagnant for over a year and has even underperformed most of the "Big Seven" tech stocks. It's currently down about 2%, lagging behind Alphabet, Apple (which surprised me), Amazon, and QQQ. Over the past year to year and a half, its performance has been lackluster. In this discussion, I'll explain why Microsoft has been underperforming, share my opinion on the company, provide my fair value estimate, and outline exactly when I’d consider buying the stock.

My Investment Approach

When analyzing stocks, I develop a thesis, determine my fair value, and set a price alert on Tiger. Once the stock hits my target price, I re-evaluate the company and decide whether to buy. This helps me avoid emotional decisions and ensures I don’t forget about potential opportunities. This strategy might be something you consider as well.

How Microsoft Makes Money

Most of Microsoft's revenue comes from:

• Microsoft 365 & LinkedIn – Over $29 billion

• Azure (Cloud Computing) – $25 billion (a rapidly growing segment)

• Personal Computing (Windows, Xbox, etc.) – Around $64 billion

Azure, in particular, is still growing at an impressive 31% year-over-year, which is incredible. AI revenue has also been a major highlight, growing at an annual rate of 175%. In their latest earnings report, Microsoft beat both revenue and earnings per share estimates.

So Why Has Microsoft Been Flat for Over a Year?

Despite these strong numbers, Microsoft’s stock has remained stagnant for a few key reasons:

1. Decelerating Growth – A year ago, Microsoft's revenue was growing at 17%, but that has now slowed to 12%. Wall Street is concerned about this slowdown, particularly because Microsoft was priced for perfection. When a stock is highly valued, even the slightest disappointment can cause it to struggle.

2. High Valuation – Microsoft’s stock was extremely expensive based on both price-to-earnings (P/E) and free cash flow metrics. When growth slows down, investors re-evaluate whether the valuation is justified.

3. Unrealistic Comparisons – Wall Street is comparing Microsoft’s current 12% revenue growth to its peak 17% growth and reacting negatively. However, expecting Microsoft to sustain 17%+ growth indefinitely is unrealistic. For a multi-trillion-dollar company, 12% growth is still very impressive.

For comparison:

Amazon, which I own, is growing at 9% year-over-year

• Microsoft is growing at 12% year-over-year, which is actually quite strong

Guidance

Microsoft is looking strong, but they did miss their revenue guidance by about $1 billion. However, as I’ve mentioned before, it all comes down to valuation versus fundamentals.

Microsoft was previously priced to perfection, and I’d argue it still is to some extent. At its peak, it was trading at 36 times earnings, which was extremely high. The five-year average multiple has been 31x, and currently, it’s trading at 28x earnings, which isn’t too bad.

I don’t believe we’ll see Microsoft return to its 2022 lows of 21x earnings—that seems highly unlikely. Since then, the company has expanded its market cap, improved return on capital, and strengthened its overall business. Given these improvements, I doubt we’ll see valuations drop back to 20-21x earnings anytime soon.

That said, 28x earnings for a company growing at 12-14% annually still feels slightly expensive. I’ll be doing a deeper dive into my valuation model and sharing the numbers I used.

Valuation

To value Microsoft, I took their projected 2024 earnings per share (EPS) of $18 and assumed 14% annual EPS growth for the next five years. Analysts estimate 11% growth this year, followed by 14%, 17%, 12%, and 15% in the following years, so 14% seems like a fair assumption—though slightly optimistic.

Using this, I project $22.72 EPS five years from now, which rounds to $23 EPS.

I then considered three valuation scenarios based on different price-to-earnings (P/E) multiples:

1. Worst-case scenario: 25x P/E

   Fair value = $568 per share43% upside over five years (~8% annual return)This is roughly in line with S&P 500 returns, which means there’s no advantage to picking Microsoft over a diversified index fund.

2. Base-case scenario: 28x P/E (current valuation)

   Fair value = $633 per share60% upside over five years (~10% annual return)This is decent but not compelling enough for me to buy.

3. Best-case scenario: 31x P/E (historical average)

   Fair value = $714 per share77% upside over five years (~12% annual return)This is solid but still falls short of my target return.

My Investment Strategy for Microsoft

Personally, I aim for a 2x return over five years (a 15% annual compounded return). This is about double the S&P 500’s historical average of 8% per year.

For Microsoft to meet my target return, I’d need to buy it at $352 per share—which is about 11% lower than current levels. That’s my ideal buy-in price.

However, I believe Microsoft is more likely to bottom out around $365-366, since it’s a high-quality company that always has buyers on dips.

At the moment, I love the company, its business model, and its AI exposure, but the valuation just isn’t attractive enough for me to buy. Especially in this market, where you have stocks like Google trading at 18x earnings and Amazon at 19x operating cash flow, both growing operating cash flow at 30-50%.

If you're already a Microsoft shareholder, I wouldn’t sell—it’s an incredible long-term investment. But for new buyers, I’d wait for a better price. Personally, I’ve set a price alert at $370, and if Microsoft drops into the low $370s, I’ll reevaluate and decide if I want to buy.

Conclusion

Despite Microsoft's recent underperformance, its fundamentals remain solid. Azure still holds 34% market share and continues to expand. The company is improving in many areas and remains a dominant player in the tech industry.

The key issue right now is valuation rather than business performance. I’ll continue to monitor the stock, and if it reaches my fair value estimate, I’ll reconsider buying.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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