Microsoft Is Cheaper Than the S&P 500. Now Is the Perfect Time to Load Up on the Stock.
Key Points
Microsoft is trading below the valuation range of its big tech peers.
The company's latest results showcased a strong and growing business.
Based on this positive outlook, the stock deserves a premium.
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Shareholders of Microsoft (NASDAQ: MSFT) have had a year of poor performance. The stock last set an all-time high in July 2025, although it nearly set a new one last October. Now, it's down around 30% from those highs, and the market appears to have little faith in the stock.
In fact, it has become so cheap that it's valued at less than the S&P 500. Is that a fair price tag? I don't think so. In fact, I think now is the perfect time to get in on Microsoft because it rarely falls to these valuation levels.
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A screaming deal right now
How cheap is Microsoft stock? I think the best valuation metric is its forward earnings, because the company is growing at an above-average pace. Plus, it has some one-time effects (like gains on investments) influencing its trailing-12-month total. From this metric, it's valued at less than 20 times forward earnings.
MSFT PE Ratio (Forward) data by YCharts; PE = price to earnings.
That's also way cheaper than at any point during the last three years. Currently, the S&P 500 trades for about 21.7 times forward earnings, so this discount is sizable for a big tech company.
The vast majority of Microsoft's big tech peers (like Alphabet, Amazon, and Apple) trade at multiples in the mid to high 20s, with Apple all the way at 36 times forward earnings. So Microsoft appears undervalued, but is there a good reason for that?
After looking at its latest quarterly results, I would say no. During its last quarter, the company's artificial intelligence (AI) revenue rose 123% year over year to a $37 billion annual run rate. Its cloud computing division, which is getting a lot of attention for its AI computing resources, grew 40%.
Overall, revenue rose 18%, with earnings per share up 23%. Those results are indicative of a company that deserves to trade in the same range as its peers, and I won't be surprised if it returns to those levels following its next earnings announcement.
Management reports earnings on July 29, and as long as it keeps the status quo, I think it will be enough to turn around the stock due to such low expectations priced in. Microsoft is a top buy now if you're looking for a cheaply valued big tech stock.
Should you buy stock in Microsoft right now?
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Keithen Drury has positions in Alphabet, Amazon, and Microsoft. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, and Microsoft. The Motley Fool has a disclosure policy.
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