Stock of the week: Microsoft Corp. (MSFT)

Fundamental Analysis

Analysts expect Microsoft’s earnings to grow by about 9% or 10% on average over the next five years. The discount rate, calculated using Microsoft’s beta of 1.07, a risk free rate of 4% and a market return of 9%, comes down to 9.4%. For my DCF analysis I let the growth rate converge to 2.5% annually over about 15 years, whereafter it stays constant. This gives Microsoft's stock a value $48 per share. At the time of writing MSFT has closed at $25.69 per share.

MSFT’s dividend, currently at 64 cents per share, gives a yield of 2.49%. Historically, MSFT’s dividends grew 12% annually on average. Using a long-term dividend growth rate of 5%, and the 9.4% discount rate as above, Gordon’s model gives MSFT a per share value of about $15. This is solely due to the fact that MSFT pays a very low dividend.

Microsoft’s P/E ratio is 11.03, which seems low, and it is. The Industry and S&P 500 P/Es are 23.71 and 15.72 respectively. MSFT's PEG ratio is 1.06, which is also low. This points to undervaluation.

Technical Analysis

MSFT’s price has just dipped below the 50-day exponential moving average, announcing bearish sentiment. MACD also generated a sell signal several days earlier. Yet the price is still above the lower Bollinger band. If price drops below $25 (going under the lower Bollinger band) a further drop is likely.