It’s Time to Buy Microsoft Stock

Microsoft, one of the best big tech companies in the world, just sold off another 3.79% today. This brings the stock down close to those March 2026 lows that we thought were great buying opportunities earlier this year. The stock is down 19.88% year-to-date, and over the past year it's down 20.74%. Today I'm going to explain why this is a great buying opportunity for Microsoft stock, which is a company that over the past decade, even after this current sell off, that grew at a 22% compound annual growth rate over the past decade. In terms of buying Microsoft stock, this is probably the best buying opportunity since fall 2022. With that said, let's roll the intro and get into today's stock analysis video. >> [music] >> The following reflects the opinions of a man who spends far too much time thinking about stocks. Please do your own research before making any investment decisions. Nothing in this video is personal financial advice. Continue at your own risk. >> My name is Zach. This is Dividend Data, and you should leave a like and subscribe to the channel if you enjoyed the video. Throughout I'm going to be using the next generation version of dividenddata.com, which I have been working away at, and I am so excited to release to you guys soon. If you want to be one of the first people to access it, sign up with the link in the description and pin comment of the video to join the waitlist, and you'll be notified right away when it's available. Today I'm just going to give you an overview of Microsoft stock, the financial growth of the company, and why I think it will keep compounding in the future. I'm also going to take a look at the current value of Microsoft stock relative to the share price on various key metrics like earnings per share, free cash flow, operating cash flow, dividend, and I'll explain which signs point to this being a historically cheap time to buy Microsoft stock and a good value, and then which metrics actually don't tell that story. So, let's get right into it. Now, we often cover dividend stocks on this channel. Microsoft is a dividend growth stock. They increased the dividend on an annual basis. It's been growing at a 9.72% compound annual growth rate over the past 10 years, and the current dividend yield sits at 0.96%. That's with a forward-looking dividend. And over the past 5 years, this is one of the best times you could have bought the stock in terms of optimizing for your starting dividend yield. It's nearly at the 90th percentile, and the only time that was higher was in fall 2022. But according to some other metrics, Microsoft stock is actually cheaper today than it was in fall 2022, and I'll get to that in a bit. As you can see, if we look at it on a 3-year basis, which Microsoft's dividend yield has been lower in that time, this is one of the best times you could have bought other than in March 2026. And if we look at the earnings per share for Microsoft's stock, this tells a very similar story. Microsoft's forward-looking P today is 22.55. This is historically low for the company. I'll go into that. And over the past 10 years, their earnings per share has grown at a 19.84% compound annual growth rate. So, Microsoft is a compounding machine, and this has actually been accelerating in recent years. As an example, if we go and look at the 5 years, it's a 16% CAGR. On the 3 years, it's 19.88%. And the company did just have their highest earnings per share ever in the latest quarter, and basically all of the guidance and every single analyst estimate it points to growth continuing. As you can see here, analysts are projecting anywhere from 25% to 15% annual growth every single year through 2030, that would mean by 2030 Microsoft stock would be earning $33.35 in annual earnings per share, which at today's stock price would be a P/E of 11.4. And I've been doing my analysis into Microsoft, many of you have watched a lot of these videos, I don't think Microsoft is anywhere near done growing. I think the growth prospects are becoming more and more obvious, especially with this huge AI wave going on. And Microsoft has a piece in pretty much that entire pie, whether it's bringing AI to enterprises, whether it's enterprise software and enterprise applications, whether it's your enterprise knowledge base. Microsoft 365, there's a lot of room to adapt and continue growing. And then in Microsoft Azure, they're seeing very high growth, 40% year-over-year growth, and a lot of that is being fueled by the demand for AI tokens, and they're building up these new data centers. And Microsoft is one of the top companies that actually manufacturing and building these data centers and bringing them to market. They have a very close relationship with Nvidia, and they are one of the first people always to get the latest generation chips and install them and get them available for customers. And if you guys are watching the channel a lot, then you know that I am very into AI and I'm following the space like a hawk. And earlier this year, there were some major advancements that made me extremely more bullish on really the entire sector, and a lot of that has to do with agentic use, and I think Microsoft has a real opportunity to bring that idea of agentic computer use and tasks, and almost the idea of digital employees, I think they have a great position to bring that into the enterprise. So frankly, I think that Microsoft should be trading at a premium right now in the market. Instead, it's trading at its deepest value pretty much ever, at least in recent history. As you can see the current P/E ratio of 22.55, that is historically low, it's in the bottom 10% over the past 5 years, the lowest is 21.99. That's the lowest afford PE has been over the past 5 years. So right now you're buying it at almost the cheapest it has been. And this is even historically cheap over 10 years. And the only time rivaling this was fall 2022, and then you have to go all the way back to 2018 and 2017 for it to be close. And if we look at the total return for Microsoft stock over the past decade, which was the last time it was cheaper than this, the stock's up 754% since then. So if you had invested $10,000 in 2016, that would be worth $75,000. That's a 23.94% compound annual growth rate. And from today's stock price with Microsoft stock, I think you could probably see similar returns moving forward. And some people might be forgetting about the powerhouse that Microsoft has been because over the past 5 years, especially from this current base, the total return wasn't that impressive. It actually trailed the market. Since 2021, it's only up 51%. That's an 8.64% compound annual growth rate. And again, I'm talking about total return here, so price plus dividends reinvested. We're a channel of dividend investors, and we know how important it is to reinvest earned dividends even in lower yield companies like Microsoft. And I'll give you some more signals here about the valuation of Microsoft stock. Then this will lead me into discussing the one red flag around a metric that analysts can use to point at something negative around Microsoft stock. So right now we're going to take a look at the value graph. I made this you can look at earnings per share, revenue, free cash flow, operating cash flow, and the dividend. And this is similar to that yield analyzer, but it gives you a different way of viewing it. It's taking a look at basically the historical median multiple over a time period. So for this time, it would be the median multiple for earnings per share over the past 5 years, that's 33.9%, and at today's current PE, that implies the stock is trading 33% below fair value. And this is actually cheaper than in fall 2022 at its low, where it was 30% below fair value. This is also the lowest it has been over the past 10 years. If we take a look at the revenue multiple, the historical 5-year median for Microsoft stock is 12.1. So, that's the price to sales ratio. The current price to sales ratio is 8.8. Microsoft is currently trading 27% below the fair value. But, then this is where we get to the one metric that Microsoft doesn't look super cheap at, which is free cash flow. So, as you can see here, the historical 5-year median for Microsoft's free cash flow multiple, that's 41.3. Current price to free cash flow is 38.6. So, Microsoft is 7% below fair value here. And this is a case where in 2022, it was way cheaper based on free cash flow. And I'll explain why in a second. If you look at operating cash flow, that tells a completely different story. 5-year median multiple for operating cash flow is 26 for Microsoft. Current price to operating cash flow is 16.5. Microsoft is currently trading 36% below fair value for operating cash flow. This is the cheapest by far other than in March 2026. Much cheaper than in 2022. And likewise, the dividend, I kind of mentioned this earlier, it's historically cheap relative to the median dividend yield. But, let's go back to this operating cash flow versus free cash flow. And this becomes obvious when we just go and look at the financials. So, here's the trailing 12-months free cash flow for Microsoft stock, $72 billion. And if we zero out the Y axis here, you can see that over the past 5 years, it's only grown from $56 billion to $73 billion. That's a 5.6% compound annual growth rate. However, if we look at operating cash flow in that time, it's grown 121% and 18.25% compound annual growth rate. Microsoft, year over year, grew their operating cash flow by 30% and it's now at 170.14 billion dollars. So Microsoft as a business, it's growing rapidly. It's growing pretty well for an extremely large company. So why is free cashflow not matching? It's the capital expenditures. Microsoft is investing heavily in AI data centers and I think it's the correct move. As you can see their capital expenditures over the trailing 12 months is just under 100 billion dollars. And if we go and look at 2022 it was under 23 billion dollars. Capital expenditures are growing at a 38% compound annual growth rate over the past 5 years. So the risk for Microsoft stock is their return on this AI investment. And I follow this space heavily and what I think from first principles personally, I see that they are going to be able to get a high return on this. Other people disagree with me. I disagree with them. If you look at Microsoft's return on capital employed over the past 10 years, you can see it's 26.9% as of last year. That's pretty solid. Return on invested capital is 21.6%. That's pretty good as well. Now to be fair, these are trailing metrics, so it's not really accounting for what these newer investments and the even larger ones they're likely going to do next year. It is unknown what kind of return on investment they're going to get on that. But overall, I think Microsoft's in a very strong position and if you want to own one of the best big tech companies in the world at a fair price, this is it. But again, this is just my opinion. Make sure you do your own research before making any investing decisions. And if you found the tool I'm using throughout the video to be interesting, it's the new version of dividenddata.com. It's going to release in the next couple of weeks and you can join the wait list with the link in the description and pin comment of the video. If you enjoyed, make sure to leave a like, comment, and subscribe to the channel and I'll see you in the next video.