Microsoft’s (MSFT - Free Report
) incredible success and rise to dominance within the tech industry has made it a topic of investment conversation for years. With a strong business model and steady returns for both short and long term investments, it has been a staple option for investors of all areas.
Microsoft currently sports a “C” grade for Value and a “C” grade for Growth in our Styles Score System. We will primarily look at these two categories to determine what investors should do with Microsoft stock right now.
Microsoft’s “C” grade in Value is not a bad one, but it is something to consider. The first statistic we will look at is its P/E ratio. It has a solid 25.4 compared to an industry average of 32.4. Value investors typically look for P/E ratios under 20, which would put Microsoft in an unfavorable position, but because it is so much lower than the industry average, we can begin to see why a “C” grade is appropriate.
That being said, must consider that the P/S ratio of Microsoft is 7.2, close to twice that of the industry. This discrepancy costs the investor significant value.
As we can see, for every positive factor that contributes to a better Value grade, there too seems to be a negative to counteract it. The investor must consider what holds more weight in order to make an educated financial decision. A similar situation occurs when we further analyze Microsoft’s “C” grade in Growth.
The most startling statistic that upgrades Microsoft’s Growth score is its Cash Flow, at $4.50/share, more than seven times the average of $0.62/share. This shows huge amounts of capital coming in with little going out and is a good indicator of company growth.
This being said, Microsoft’s debt/equity ratio is 1.01, signifying that its debt is more, albeit barely, than its common equity. This does not seem that bad until we consider the industry average of .07. So while massive amounts of capital are moving into Microsoft, it would also appear that they are carrying a substantial amount of debt, especially when compared to the computer software industry.
As stated earlier, individual evaluation methods differ and so, in the eyes of investors, different factors will have more or less influence on their financial decision. From a holistic perspective, it makes sense why Microsoft has received a middle ground “C” grade for Growth.
The features of Microsoft that make its Value and Growth appealing, such as P/E ratio, earnings yield, and cash flow, are combatted by factors in different areas that make it less appealing, such as P/S and debt/equity ratios.
This being said, investors must evaluate which metrics are the most valuable in their mind and decide based on these. The overall middle-ground stance Microsoft takes has resulted in its Zacks Rank #3 (Hold).
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