Microsoft’s (NASDAQ:MSFT) valuation appears to be extremely high for a choice with “slowing” growth. Furthermore, free cash flow generation of 3% falls far short of the 8.5% CPI during the previous 12 months.
Microsoft has never been this expensive in relation to changes in the cost of living, with the exception of its early years of extremely fast growth in the 1980s and 1990s.
So until inflation rates decline, probably during a recession until 2023, it is hard to be bullish on Microsoft.
How Does Microsoft Perform During Difficult Economic Times?
How has Microsoft performed during prior declines in “real” GDP, if a recession and ongoing economic downturn are on the horizon? The solution is superior to the average S&P 500 corporation.
That’s why many analysts are projecting flat total returns of +15% to -15% for Microsoft over the next 12 months (including a tiny 0.9% annual dividend yield).
Wild predictions of significant gains or losses may not come true. The good news for stockholders is that it is anticipated that shares will continue to perform similarly to or better than the average blue chip equity in the S&P 500. Since this projection is a little better than last year’s, many analysts have raised their recommendations to Hold.
Microsoft’s Value is Still High
This stock is still overvalued relative to trade activity over the last three decades, but it is not completely out of limits. You must think that Microsoft’s results will fall short of current analyst estimates due to the worsening economy and that the company’s already high valuation will result in another poor year (or worse) for overall investment returns.
In terms of what is mathematically conceivable for compounding, significant growth rates during a recession may be something of a pipe dream for one of the largest corporations in the world.
The price to trailing revenue, cash flow, and book value multiples are therefore far from being at bargain levels.
According to fundamental assessments, the best moment to purchase Microsoft was between 2011 and 2013, when the economy was recovering from the effects of the 2009–10 recession.
Currently, the majority of ratios and multiples on fundamental company performance are double and triple during this window of opportunity.
The average over the long run of the below ratios would be $185 per share, or what is known as “fair value.”
The bottom line is this stock is not entirely immune to recessions or severe bear market drops.
Featured Image: Megapixl @Wolterk
