Should You Buy Microsoft Stock Despite Its High Valuation?

Microsoft (NASDAQ:MSFT) has been a star performer this year, with its stock soaring over 20%. This significantly outpaces the broader market, as the S&P 500 is up 7%, and its peers like Amazon have seen just a 5% gain, while Google is up less than 1%. This impressive performance is largely due to robust cloud growth—Azure revenue alone jumped 33% in the third quarter of fiscal year 2025—and its continued momentum in AI integration. Microsoft’s strong position in the burgeoning AI boom has clearly been a major driver of investor confidence.

But at current levels of $510, is there still room for growth? We believe there is.

We reached this conclusion by comparing MSFT stock’s current valuation with its operating performance in recent years, as well as its present and historical financial condition. Our analysis of Microsoft, across key parameters such as Growth, Profitability, Financial Stability, and Downturn Resilience, reveals a company with a very strong operating performance and financial condition, as detailed below.

That said, if you seek upside with lower volatility than individual stocks, the Trefis High Quality portfolio presents an alternative — having outperformed the S&P 500 and generated returns exceeding 91% since its inception. Separately, is PepsiCo stock still attractive? See What’s Happening With PepsiCo Stock?

How Does Microsoft’s Valuation Look vs. The S&P 500?

Going by what you pay per dollar of sales or profit, MSFT stock looks expensive compared to the broader market.

• Microsoft has a price-to-sales (P/S) ratio of 14.0 vs. a figure of 3.1 for the S&P 500
• Additionally, the company’s price-to-free cash flow (P/FCF) ratio is 54.7 compared to 20.9 for S&P 500
• And, it has a price-to-earnings (P/E) ratio of 39.2 vs. the benchmark’s 26.9

How Have Microsoft’s Revenues Grown Over Recent Years?

Microsoft’s Revenues have seen notable growth over recent years.

• Microsoft has seen its top line grow at an average rate of 12.0% over the last 3 years (vs. increase of 5.5% for S&P 500)
• Its revenues have grown 14.1% from $237 Bil to $270 Bil in the last 12 months (vs. growth of 5.5% for S&P 500)
• Also, its quarterly revenues grew 13.3% to $70 Bil in the most recent quarter from $62 Bil a year ago (vs. 4.8% improvement for S&P 500)

How Profitable Is Microsoft?

Microsoft’s profit margins are considerably higher than most companies in the Trefis coverage universe.

• Microsoft’s Operating Income over the last four quarters was $122 Bil, which represents a considerably high Operating Margin of 45.2%
• Microsoft’s Operating Cash Flow (OCF) over this period was $131 Bil, pointing to a considerably high OCF Margin of 48.4% (vs. 14.9% for S&P 500)
• For the last four-quarter period, Microsoft’s Net Income was $97 Bil — indicating a considerably high Net Income Margin of 35.8% (vs. 11.6% for S&P 500)

Does Microsoft Look Financially Stable?

Microsoft’s balance sheet looks very strong.

• Microsoft’s Debt figure was $61 Bil at the end of the most recent quarter, while its market capitalization is $3.8 Tril (as of 7/21/2025). This implies a very strong Debt-to-Equity Ratio of 1.6% (vs. 19.4% for S&P 500). [Note: A low Debt-to-Equity Ratio is desirable]
• Cash (including cash equivalents) makes up $80 Bil of the $563 Bil in Total Assets for Microsoft.  This yields a strong Cash-to-Assets Ratio of 14.2%

How Resilient Is MSFT Stock During A Downturn?

MSFT stock has seen an impact that was slightly better than the benchmark S&P 500 index during some of the recent downturns. Worried about the impact of a market crash on MSFT stock? Our dashboard – How Low Can Microsoft Stock Go In A Market Crash – has a detailed analysis of how the stock performed during and after previous market crashes.

Inflation Shock (2022)

• MSFT stock fell 37.6% from a high of $343.11 on 19 November 2021 to $214.25 on 3 November 2022, vs. a peak-to-trough decline of 25.4% for the S&P 500
• The stock fully recovered to its pre-Crisis peak by 15 June 2023
• Since then, the stock has increased to a high of $511.70 on 17 July 2025 and currently trades at around $510

COVID-19 Pandemic (2020)

• MSFT stock fell 28.2% from a high of $188.70 on 10 February 2020 to $135.42 on 16 March 2020, vs. a peak-to-trough decline of 33.9% for the S&P 500
• The stock fully recovered to its pre-Crisis peak by 9 June 2020

Global Financial Crisis (2008)

• MSFT stock fell 59.1% from a high of $37.06 on 1 November 2007 to $15.15 on 9 March 2009, vs. a peak-to-trough decline of 56.8% for the S&P 500
• The stock fully recovered to its pre-Crisis peak by 6 November 2013

Putting All The Pieces Together: What It Means For MSFT Stock

In summary, Microsoft’s performance across the parameters detailed above are as follows:

• Growth: Very Strong
• Profitability: Extremely Strong
• Financial Stability: Extremely Strong
• Downturn Resilience: Neutral
• Overall: Very Strong

Overall, Microsoft stock has performed exceptionally well across all key parameters, which helps explain its premium valuation. Currently trading at $510, the stock is at 39 times its trailing earnings, a slight increase from its four-year average price-to-earnings ratio of 35.

However, we believe this premium is justified, and there’s potential for further expansion. This outlook is driven by robust sales growth in Azure and improving profitability, as evidenced by Microsoft’s operating margin expanding from 41.8% in 2023 to 45.2% now. Related – The Bull Case For Microsoft’s Next 2x Rally.

Of course, our assessment might be incorrect, and investors may not be willing to pay an even higher premium for MSFT stock given its already lofty valuation, and other risks, such as the recent security breach. Nonetheless, if you’re confident that AI growth will continue, and you have a 3-5 year investment horizon, Microsoft is likely to be a winning stock.

Not too happy about the volatile nature of MSFT stock? Consider the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has a track record of comfortably outperforming the S&P 500 over the last 4-year period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

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