Microsoft’s valuation is caught between dot-coms and Gen Z. The company said on Tuesday that quarterly revenue had grown 17%, in part due to rapid sales growth in its Azure cloud businesses. That helped drive the value of the company led by Satya Nadella to $ 1.8 trillion, implying a price-earnings multiple that hadn’t been seen in 20 years. Compared to today’s tech companies, it just seems curious. But Microsoft’s story does ring some alarm bells.
The company said earnings per share for the quarter rose 34%, beating analysts’ expectations and sending shares soaring 5% after the market closed. Microsoft is now trading at more than 30 times its estimated earnings for next year. It’s the highest price since the dot-com era and triple that of 2010.
Many things have changed since then. The company’s software is more established as Excel and Word continue to dominate business use. Nadella has been smarter at closing deals than his predecessor Steve Ballmer. Most importantly, Microsoft has entered the rapidly growing market for cloud service delivery. It does not break down Azure revenue. But he says quarterly sales grew 50%. That’s about 20 percentage points faster than Amazon is seeing on AWS, the most valuable part of your business.
Although analysts expect earnings growth to barely reach double digits in the next two years, the valuation of the company is reasonable, at least in relative terms. At 32 times the profit, it is about half the multiple it achieved during a short period of time at the turn of the millennium. It also trades at about a third of Amazon’s price-earnings multiple, and is extraordinarily conservative compared to Snowflake, the upstart. [upstart, en inglés] and technological deficit, valued at 70 times the income.
However, relative valuations are not necessarily accurate, so let’s do a realistic analysis here. Two decades ago, Microsoft’s profits were growing at a double-digit rate. Still, although earnings doubled over the next decade, the pace of their growth slowed, and the multiple paid by investors contracted to about 10 times the estimated earnings. The shares lost nearly half their value as a result. Although Microsoft’s earnings are gathering steam, history shows that it is dangerous to assume that growth can continue at the current rate. And it’s even more reckless to think that current champagne-fueled valuations will hold up.