No Growth Potential. And It’s Not About Microsoft

  • Microsoft is currently overvalued by about 20%. But is the market inclined to eliminate this overvaluation?
  • Since the beginning of the year, the Nasdaq index has been growing along with gold, ignoring the dynamics of consumer spending.
  • The main drivers of Microsoft’s recent capitalization growth are external and temporary.
  • I will start with my standard introduction to clearly describe my paradigm of perception of what is happening in the stock market.

The stock market is best associated with a pendulum. It is in constant motion, but from time to time returns to a balanced (or rational) state. Therefore, if we are trying to predict the price of a company, we need to look for an answer to two questions. Firstly, what is the company’s current rational price. And secondly, what is the state of the market pendulum.

#1 What is Microsoft’s current rational price?

Very briefly. The following model best reflects the specifics of 2020 in the context of the rationality of Microsoft’s (MSFT) current price:

In the current year, Microsoft’s annual revenue growth rate showed no acceleration and forecasts are not encouraging either. But at the same time, the P/S multiple of the company showed a stable growth. Agree, other things being equal, this is not normal.

In the case of Microsoft, there is also a stable relationship between the growth rate of FCF and the EV/FCF multiple. And, judging by this relationship, MSFT’s market price is also overstated at the moment:

Now, let’s look at how the capitalization of Microsoft responds to the growth of its absolute financial indicators. There are also a number of qualitative dependencies, all of which characterize Microsoft as overvalued: