Microsoft stock has a premium valuation but without the performance.
Microsoft (MSFT 0.73%) stock just did something that should be a warning sign for investors. It recently reported its first-quarter fiscal year 2025 (ending Sept. 30) results, and the stock dropped despite beating expectations.
That’s never a good sign, and whenever you see it, it should prompt you to investigate further. While a stock dropping after beating expectations is never good, there’s another warning sign Microsoft is exhibiting, and it could spell further trouble ahead.
Microsoft’s guidance for the next quarter was weak
In the first quarter, Microsoft reported earnings of $3.30 per share, while analysts only expected $3.10. This came on the back of 16% revenue growth, which is impressive considering Microsoft’s size.
However, one issue Wall Street had with Microsoft’s quarter was its guidance, which was soft. For Q2, the company is expecting only 11% revenue growth. While that’s still double digits, it doesn’t match up well with Microsoft’s valuation.
Microsoft is one of the most expensive big tech stocks, yet it isn’t growing as quickly as some of its peers. Microsoft now trades for 31.5 times forward earnings, a hefty premium for any stock.
MSFT PE Ratio data by YCharts.
When you compare that valuation to some of Microsoft’s peers, the investment thesis for the stock starts to break down.
There are far better options than Microsoft
Let’s look at some other big tech companies and their valuations. Some of the obvious comparisons are Microsoft’s “Magnificent Seven” companions, and nearly all of them (except for Nvidia) reported earnings for the most recent quarter.
| Company | Q3 Revenue Growth | Q3 EPS Growth | Forward P/E |
|---|---|---|---|
| Microsoft | 16% | 10.7% | 31.3 |
| Apple | 6.1% | (34%) | 30.2 |
| Amazon | 11% | 52.1% | 38.9 |
| Alphabet | 15.1% | 37.2% | 21.4 |
| Meta Platforms | 18.6% | 37.8% | 25.2 |
Data source: YCharts. Note: Q3 is for the quarter encompassing July through September; each company may have a different FY quarter.
Microsoft and Apple gather fairly hefty premiums despite putting up not very good results. This could become an issue for both companies, as they need to put up market-crushing results if they are going to trade at a significant premium to the market (the S&P 500 trades for 23.8 times forward earnings).
Microsoft’s next quarter isn’t expected to be anything special. Wall Street analysts don’t expect its full-year results to change, either. For FY 2025, Wall Street analysts expect 14% revenue growth and earnings per share (EPS) growth of 10%. So, with Microsoft expected to put up fairly bland results for FY 2025, don’t be surprised if its valuation ticks down throughout the year, putting negative pressure on the stock.
Where will some of that money flow? My guess is to companies like Alphabet, Meta Platforms, or Amazon. All three posted fantastic results in the most recent quarter. Furthermore, despite much better results, Alphabet and Meta are cheaper than Microsoft. Amazon may be more expensive, but its earnings growth more than makes up for that discrepancy.
Investors must assess what stock gives them the best chance for market-beating performance. With Microsoft (and Apple, for that matter) producing lackluster results and trading for premium valuations, they don’t seem like the best options to invest in right now. As a result, I’d consider trimming some of your Microsoft shares, taking some of that money, and putting it into cheaper big tech companies like Alphabet, Meta Platforms, or Amazon.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Keithen Drury has positions in Alphabet, Amazon, and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
