Is Microsoft still an expensive stock?

Microsoft (Microsoft Stock Quote, Chart, News NASDAQ:MSFT) had a nice bounce-back on Tuesday but the stock remains well below its all-time high set in February. And so, despite the ongoing market volatility is now maybe a good buying opportunity for MSFT?

Jason Mann of EdgeHill Partners says not really, as the stock could still use some cooling off.

“We very much liked Microsoft on a good part of the run up, but frankly, last year it just got too expensive for us with this, call it growth at any price,” said Mann, chief investment officer at EdgeHill Partners, speaking to BNN Bloomberg on Tuesday.

“In Microsoft’s case it's their cloud business that's really driving the multiple expansion.
But last year was a good example of prices going up, but earnings not necessarily following in lockstep,” Mann said.

The coronovirus outbreak and now faltering oil prices have been wreaking havoc with markets around the world, with the tech sector not escaping the hit. Monday’s carnage saw the tech-heavy Nasdaq Composite lose 7.3 per cent of its value while the S&P500 fell 7.6 per cent and the Dow Jones Industrial Average dropped 7.8 per cent.

Familiar tech names like Alphabet, Apple and Facebook are now in negative territory for the year while Amazon and Netflix have managed to stay in the black.

In Microsoft’s case, the stock finished 2019 up an incredible 87 per cent, taking MSFT to $293.65 per share. The share price kept climbing to $324.34 late January but has been yanked down in recent weeks, closing on Tuesday at $285.34.

Although Mann said Microsoft is still expensive, the company is fundamentally sound, and thus should reward investors — if they can get it a little cheaper.

“It's held in relatively well in the context of the market we've seen, but it's still not cheap enough for us. It’s trading at, call it, 19x EV/EBITDA and 30x-ish P/E,” says Mann. “We have no problem with the balance sheet, no problem with the quality of the earnings, a very high return on equity. It has strong price momentum but it's that valuation that has just gotten too expensive for us.”

“This would definitely be the type of stock we'd look to buy after a pullback after the valuation catches up because it's most likely going to maintain its relative performance versus a lot of these other stocks,” Mann added.

Microsoft last reported its earnings in late January, where its fiscal second quarter beat analysts’ estimates for both profit and revenue, with management issuing better-than-expected guidance as well.

MSFT reported revenue growth of 62 per cent from its Azure cloud business, with total revenue climbing 14 per cent year-over-year to $36.91 billion. Analysts had been expecting $35.68 billion. On earnings, Microsoft’s $1.51 per share handily beat the consensus $1.32 per share.

Late last month, Microsoft said that factory work stoppages in China as a result of the coronavirus outbreak would likely impact the production of personal computers and thus cut into the company’s revenue stream in upcoming quarters.