Microsoft Stock Hasn't Been This Cheap Since 2019. Now Is the Perfect Time to Buy.
Key Points
Microsoft's AI business is crushing it.
Its P/E ratio has been skewed recently by one-time effects.
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Over the past few years, Microsoft (NASDAQ: MSFT) has traded at a premium to the market. However, that's no longer the case. The company didn't do much to lose this premium; instead, it looks like that premium shifted to Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL). However, I think that has created a potential opportunity for Microsoft stock to rally over the next few months and regain its premium valuation by the time 2026 is over.
On a price-to-earnings basis, Microsoft stock hasn't been this cheap since 2019, and based on the value proposition it's offering investors, there has seldom been a better time to buy.
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Microsoft has reached a rare valuation point
Microsoft does a lot of different things as a business, but none is more important than artificial intelligence. This is the technology that will define the company's future, and Microsoft must get it right. Based solely on its finances, I think it's doing just fine so far.
Microsoft's revenue rose 18% year over year during its latest quarter, but the annual run rate of its AI business rose by 123% to $37 billion. Its cloud computing segment, Azure, grew at a 40% clip, another strong performance compared to its peers.
Yet despite how well Microsoft is doing well from a business standpoint, that hasn't helped its case from a valuation perspective.
MSFT Price to CFO Per Share (TTM) data by YCharts.
The two valuation metrics I want to focus on are the price-to-earnings (P/E) ratio and the price-to-operating-cash-flow ratio. The P/E ratio may be more commonly used by retail investors to gauge the value of stocks, but as a metric, it is affected by more items. One of them is changes in the value of the company's portfolio of investments, and over the past few quarters, that factor has been significant for Microsoft. By contrast, operating cash flow only measures how much cash the company actually generates from its businesses. From this standpoint, Microsoft hasn't been this cheap since 2019, although that's also true for the P/E ratio.
Companies rarely sink to relative valuation lows when they're growing rapidly. That's why I think investors have a compelling buying opportunity for Microsoft stock. It offers a rare combination of growth and value right now. With the market currently bullish on other tech stocks, this would be a phenomenal stock to scoop up before a potential rally begins in the second half of 2026.
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Keithen Drury has positions in Alphabet and Microsoft. The Motley Fool has positions in and recommends Alphabet and Microsoft. The Motley Fool has a disclosure policy.
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