Microsoft (NASDAQ:MSFT) has reportedly canceled certain leases for US data center space. This development has prompted questions about the company’s long-term requirements for AI computing capacity. Notably, Microsoft recently reiterated its commitment to an $80 billion capital expenditure plan for the current fiscal year, ending in June, with a signficant portion of that investment directed towards the construction of data centers designed to support AI workloads.
MSFT stock declined 1% in a week, and at its current levels of around $400, it looks attractive but volatile – making it a tricky pick to buy. We believe there is minimal cause for concern with MSFT stock, which makes it attractive but highly sensitive to adverse events as its current valuation is very high.
We arrive at our conclusion by comparing the current valuation of MSFT stock with its operating performance over the recent years as well as its current and historical financial condition. Our analysis of Microsoft along key parameters of Growth, Profitability, Financial Stability, and Downturn Resilience shows that the company has a very strong operating performance and financial condition, as detailed below.
How does Microsoft’s valuation look vs. the S&P 500?
Going by what you pay per dollar of sales or profit, MSFT stock looks expensive compared to the broader market.
• Microsoft has a price-to-sales (P/S) ratio of 11.8 vs. a figure of 3.1 for the S&P 500
• Additionally, the company’s price-to-operating income (P/EBIT) ratio is 26.2 compared to 24.4 for S&P 500
• And, it has a price-to-earnings (P/E) ratio of 24.5 vs. the benchmark’s 24.4
How have Microsoft’s revenues grown over recent years?
Microsoft’s Revenues have seen notable growth over recent years.
• Microsoft has seen its top line grow at an average rate of 13.5% over the last 3 years (vs. 9.8% for S&P 500)
• Its revenues have grown 15.0% from $228 Bil to $262 Bil in the last 12 months (vs. change of 5.6% for S&P 500)
• Also, its quarterly revenues grew 12.3% to $70 Bil in the most recent quarter from $62 Bil a year ago (vs. 7.2% change for S&P 500)
How profitable is Microsoft?
Microsoft’s profit margins are considerably higher than most companies in the Trefis coverage universe.
• Microsoft’s Operating Income over the last four quarters was $118 Bil, which represents a considerably high Operating Margin of 45.0% (vs. 12.6% for S&P 500)
• Microsoft’s Operating Cash Flow (OCF) over this period was $126 Bil, pointing to a considerably high OCF-to-Sales Ratio of 48.0% (vs. 14.4% for S&P 500)
Does Microsoft look financially stable?
Microsoft’s balance sheet looks strong.
• Microsoft’s Debt figure was $62 Bil at the end of the most recent quarter, while its market capitalization is $3.0 Tril (as of 2/24/2025). This implies a very strong Debt-to-Equity Ratio of 2.0% (vs. 19.7% for S&P 500). [Note: A lower Debt-to-Equity Ratio is desirable]
• Cash (including cash equivalents) makes up $72 Bil of the $534 Bil in Total Assets for Microsoft. This yields a moderate Cash-to-Assets Ratio of 13.4%(vs. 14.1% for S&P 500)
How resilient is MSFT stock during a downturn?
MSFT stock has been more resilient than the benchmark S&P 500 index during the last 2 economic downturns. Worried about the impact of a market crash on MSFT stock? Our dashboard How Low Can Microsoft Stock Go In A Market Crash? has a detailed analysis of how the stock performed during and after previous market crashes.
COVID Recession (February to April 2020)
• MSFT stock fell 28.0% from a high of $180.13 on 10 February 2020 to $129.62 on 16 March 2020, vs. a peak-to-trough decline of 33.9% for the S&P 500
• The stock fully recovered to its pre-Covid peak by 8 June 2020 – taking 84 days to recover while the S&P 500 took 148 days
• Since then, the stock has increased to a high of $464.85 on 7 July 2024 and currently trades at around $400.
Great Recession (December 2007 to June 2009)
• During the 2007-09 recession, MSFT stock fell from a peak value of $26.63 on 4 November 2007 to $11.20 on 9 March 2009 a decline of 57.9% (vs. a peak-to-trough decline of 56.8% for the S&P 500)
• However, the stock fully recovered to its pre-recession peak by 22 August 2013 – taking 1627 days to recoup its losses vs. the 1480 days taken by the S&P 500 to recover
Putting all the pieces together: What it means for MSFT stock
In summary, Microsoft’s performance across the parameters detailed above are as follows:
• Growth: Very Strong
• Profitability: Extremely Strong
• Financial Stability: Very Strong
• Downturn Resilience: Strong
• Overall: Very Strong
Hence, despite its very high valuation, the stock appears attractive but volatile, which supports our conclusion that MSFT is a tricky stock to buy.
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