This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Carnevale: Microsoft Too Cheap to Ignore

Stocks in this article: MSFT

Consequently, Microsoft's stock price, along with many other high-profile technology names, represented massive overvaluation. In other words, even Microsoft's exceptional earnings power prior to and subsequent to 1999 and 2000 could not justify its absurdly lofty valuation. At its peak valuation, Microsoft was trading at PE ratios exceeding 80, while earnings only justified a fair value PE of 15.

Therefore, Microsoft's stock price had nowhere to go but down until price eventually aligned with earnings, by Feb. 2008.

This was just in time for the Great Recession to sink most all stock prices to below fair value (the orange earnings justified valuation line). Moreover, I believe that earnings growth for 2012 and 2013 has been temporarily reduced due to the launch of Windows 8 (see each year's growth rate calculation at the bottom of the graph).

Currently, 35 analysts reporting to Capital IQ forecast five-year forward earnings growth of 10% per annum.

My final earnings and price correlated graph on Microsoft paints a clear picture of a fiscally fit blue-chip technology bellwether. The massive overvaluation that the company had suffered with for so long is now gone. Today I believe that Microsoft offers investors growth and an above market (with potential annual increases), dividend yield of 3.2%. Microsoft's balance sheet is strong, and cash flow generation high. But most importantly, with a blended PE ratio of only 10, Microsoft appears to be bargain priced based on fundamentals. Perhaps there's a lot of fight yet left in this dog.

Summary and Conclusions

At current levels, I believe that Microsoft offers long-term investors three proverbial kicks at the profit cat. I expect future price gains to be generated based on above-average earnings growth (10% per annum), a potential expansion in the PE ratio from its current below-market PE of 10 to a market average PE of 15, and finally the opportunity for above-average and growing dividend yield. Add it all up, and I believe Microsoft offers the prudent long-term fundamental investor above-average growth and income, plus a margin of safety based on its low valuation.

At the time of publication, Carnevale was long MSFT, although positions may change at any time.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

3 of 3

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 18,030.21 +6.04 0.03%
S&P 500 2,081.88 -0.29 -0.01%
NASDAQ 4,773.4720 +8.0480 0.17%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs