Microsoft Valuation

I purchased another $500 of Microsoft today. And I have been dollar cost averaging into Microsoft for the past few months.   

You may ask: Why are you buying Microsoft when it's already up 37% YTD? How can this company possibly be undervalued when it's already gone up this much?   

That is the wrong way to view most investments. That's called anchoring bias. What we should be focused on instead of what a stock has done historically is what it will do in the future.   

Microsoft has an average earnings estimate of $10.06 in 2023. That means that even if the stock maintains it's current 33 forward PE ratio into next year, it will be $330 per share. That's a 11% gain in 1 year if on price appreciation and dividend. Not bad! Especially considering it's a pretty stable company like Microsoft.   

But I believe there's a strong possibility that with the continued growth and dominance of Microsoft that they will trade at a 35 forward PE next year. If that happens, that means the stock would be at $350 per share. That would be a 17.6% return in 1 year based on today's price.   

Also - keep in mind that Microsoft almost always beats their earnings estimates. Since 2017 Microsoft has beat their earnings estimates every quarter and done so by an average of around 8-10%. So I think it's unlikely that they won't hit these earnings targets.   

What about a multiple contraction? What if Microsoft goes from it's current 33 forward PE to a 25 forward PE? Well, I think that's very unlikely. Microsoft has possibly one of the widest moats in the market, one of the strongest balance sheets, one of the most diversified reliable income streams, and it's more insulated from regulation than the rest of big tech currently. 

If Microsoft's multiple contracted and didn't expand, I think that would be the result of a market-wide pull-back where people are more likely to recede into the safety of big safe tech companies like Microsoft, not abandon them.   I hope this gives more clarity into buying Microsoft even after a great runup. Ignore anchoring bias. Look for value wherever it is. I still see a lot of value and good returns ahead for this great dividend paying beast.