Microsoft (MSFT) continues to deliver a very steady and highly profitable earnings stream to its shareholders. At first glance, Microsoft has all the hallmarks of being overvalued -- it is a household name and already one of the biggest companies in the world. Despite these characteristics, however, it is still astonishingly undervalued.

Quarterly Results: All-Around Positive

Microsoft posted solid 13% revenue growth in its fiscal 2019 second quarter ending in December, while operating income fared particularly well and was up 17% year-over-year. With the all stock-based acquisition of GitHub, Microsoft's EPS numbers were slightly diluted down, but nevertheless recorded 14% of year-over-year growth (all figures discussed are in constant currency).

Microsoft's earnings results had plenty of goods news all around. For example, Microsoft's commercial revenue annuity mix continues to be remarkably strong, presently at 89%. This is a great win for Microsoft, because this recurring revenue allows management plenty of cash and predictability to focus on growing other businesses that require more of management focus and energy. Furthermore, this level of predictability is ultimately well rewarded by investors.

Unmatched Capital Return Program

Microsoft's free cash flow of $5.2 billion was down 2% year-over-year. Nevertheless, given Microsoft's rock-solid balance sheet with just over $50 billion of net cash, the company was able to return a considerable amount of cash to its shareholders.

Specifically, Microsoft returned $6.1 billion to shareholders via repurchases and $3.5 billion in dividends, for a total of $9.6 billion in the quarter, or just over 1% of its market cap. This demonstrates once again that Microsoft is committed to returning large sums to its shareholders.  

Guidance Not As Strong As Hoped For

Microsoft had a particularly strong fiscal 2018, which makes any comparisons for the current 2019 fiscal year a tough comparison. On the earnings call, Microsoft gave investors the following guidance:

The aspect that readers should focus on is how evenly distributed the growth is around Microsoft's total consolidated growth figure of 11%. Many Wall Street analysts were unimpressed with the lack of positive surprises posted in Microsoft's guidance; however, I see that as a positive.

Furthermore, many analysts were unenthused with the fact that Azure's top line is now slowing and only posting growth of 76%, and that it looks likely to continue to trend down throughout the remainder of Microsoft's fiscal year. However, we should step back and think of Azure less as a standalone product, but more as a complementary agent to keep Microsoft as the go-to service provider for all of the modern workforce needs.

Valuation - Cheaper Than All Its Peers

As we can see in the table, although Microsoft's Price-to-Sales ratio is higher than that of its peers, Microsoft more than accounts for this high multiple by the fact that its revenue translated into very strong cash flows. We can see this sentiment echoed in the Price-to-Cash-Flow multiple of 17.3x, as Microsoft presently trades with at least a 30% discount to its peers' cash flows.

In other words, we can see that despite continuously posting well-rounded revenue and cash flow growth, investors remain skeptical of Microsoft's ability to grow. As a value investor, I am a staunch believer that the best time to profit is by investing into strong cash flow-generating companies when investors are apathetic.

Final Word

Microsoft continues to steadily deliver solid growth backed by strong earnings. It is not the cheapest stock available, but on the other hand, you don't typically get this level of quality and a cheap stock. When Microsoft was under Steve Ballmer's reign, it's true the stock was cheaper, but its performance was lackluster, too. Now, under CEO Satya Nadella, Microsoft is more expensive, but continues to grow reliably and steadily, and deliver a strong earnings stream and terrific returns on capital.

Microsoft is a holding in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells MSFT? Learn more now.

I have no positions in any stocks mentioned.