There have been few opportunities over the past decade to buy Microsoft (MSFT 1.13%) stock at its current price. Although it has rallied from its recent lows, it's still down over 20% from its all-time highs. And while that's not as cheap as it was a few days ago, it's still a solid price to pay for one of the world's best companies.
The market has mispriced Microsoft's stock, and it still looks like a screaming deal that investors should be buying every chance they get.
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Microsoft's stock is still historically cheap
When I look at Microsoft's stock, I only like to use valuation information related to the past decade. This displays the current iteration of Microsoft's business, which is subscription-heavy and also has a significant cloud computing component. If we utilize this time frame, Microsoft's stock is still historically cheap.
MSFT PE Ratio data by YCharts
While 26 times earnings may be expensive in some aspects, Microsoft has been one of the most consistent and impressive performers in the stock market over this time frame. As a result, it has earned a premium. Microsoft is also an integral part of the next phase of tech, artificial intelligence (AI).
NASDAQ: MSFT
Key Data Points
Many companies are building their AI platforms on Microsoft's infrastructure via its cloud computing offering, Azure. This solidifies Microsoft's place in the future era of AI, even if its current dominance in business software remains fairly unchallenged.
Another way I like to look at Microsoft's stock is its operating price-to-earnings ratio. This cuts out some of the noise that occurs in the net income calculation, as there can be one-time effects, tax benefits, or costs, as well as gains on investments that affect this calculation.
MSFT Operating PE Ratio data by YCharts
From this standpoint, Microsoft is still at one of its cheapest levels in recent history. So, just because Microsoft has rallied in recent weeks doesn't mean that you've missed your buying opportunity.
If Microsoft returns to the higher range of its valuation, say about 30 times operating profits, the stock has 36% upside from here. That's several years' worth of market growth available in a short time frame. If the Iran war continues to wind down and the market sees a solid round of first-quarter earnings reports, I have no doubt Microsoft stock could rally significantly from here.
As a result, I still think it's an excellent buy.
