In the past few months, Microsoft Corp. (Nasdaq: MSFT) crossed an important bearish threshold it hasn’t seen in years…
Don’t get me wrong — as a company, Microsoft is doing lots of things right. I’m a fan of the impressive turnaround engineered by CEO Satya Nadella.
But buying the stock here is just plain wrong.
Why? Well, relative to the quarterly profits it earns, the last time it was this expensive to buy the stock was in 1999, in the waning days of the dot-com bubble.
And we all know what happened after that.
Price Paid, Value Received
Check out the chart below, which matches Microsoft’s stock price (black line) versus the red line of its price-to-earnings (P/E) ratio:
(Source: Capital IQ)
Microsoft’s Stock Price
Does that mean Microsoft’s stock can’t continue to climb from here? No. But with a P/E value of around 70 — the same as in 1999 — the odds of the stock continuing its rise one, two or three years out go down commensurately.
How can that be? An analyst at Moody’s recently predicted that the company, along with tech brethren like Oracle, Adobe Systems and Salesforce.com, should continue to deliver profits at a growth rate over and above that of the global economy.
I have no doubt of that. But legendary investor Warren Buffett has an old saying that reflects a situation like this: “Price paid, value received.”
In other words, at this point the price of Microsoft shares more than fully reflects all the optimism and positive changes that Nadella and his crew brought to the company in recent years.
In other words, buying the stock now because of the company’s newfound emphasis on cloud computing and information technology services is like driving a car while staring in the rearview mirror.
Jeff L. Yastine
Editor, Total Wealth Insider