Assessing Microsoft’s Value After Recent 4.1% Pullback and AI Developments

If you're wondering whether Microsoft's stock is a bargain, you're not alone. Now is the perfect time to dig into what really drives its value. Despite an impressive 18.5% gain over the past year and a strong 106.1% return over three years, Microsoft's shares recently dipped 4.1% across a turbulent week. This recent pullback comes as investors respond to headlines about regulatory scrutiny in technology, ongoing developments in artificial intelligence, and Microsoft's latest strategic partnerships in the cloud space. Each of these has added fuel to the debate around Microsoft's long-term growth and risk profile. Right now, Microsoft scores a 4 out of 6 on our value assessment, suggesting it's undervalued according to several checks. We'll break down how that score stacks up across different valuation methods and show you a better way to understand fair value before we wrap up.

Microsoft delivered 18.5% returns over the last year. See how this stacks up to the rest of the Software industry.

Approach 1: Microsoft Discounted Cash Flow (DCF) Analysis

The Discounted Cash Flow (DCF) model estimates a company's intrinsic value by projecting its future cash flows and discounting them back to today's dollars. This approach aims to determine what Microsoft is truly worth, based on how much cash the business is expected to generate over time.

Right now, Microsoft's latest twelve-month Free Cash Flow sits at $89.4 billion. Looking ahead, analyst forecasts suggest that cash flows will continue to rise sharply, projecting Free Cash Flow to reach $206.2 billion by 2030. It is important to note that while analyst coverage typically extends only five years into the future, further years are extrapolated for this model by Simply Wall St.

By discounting all of these projected cash flows back to present value, the DCF model calculates an intrinsic fair value of $602.59 per share for Microsoft. Compared to its current share price, this implies the stock is trading at a 17.6% discount, making Microsoft appear undervalued on these metrics.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Microsoft is undervalued by 17.6%. Track this in your watchlist or portfolio, or discover 868 more undervalued stocks based on cash flows.MSFT Discounted Cash Flow as at Nov 2025

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Microsoft.

Approach 2: Microsoft Price vs Earnings (P/E)

For mature, profitable companies like Microsoft, the Price-to-Earnings (P/E) ratio is one of the most common ways investors gauge value. The P/E ratio reflects how much the market is willing to pay for each dollar of earnings generated, making it especially insightful for businesses with consistent profits like Microsoft.

Story Continues

What constitutes a “normal” or “fair” P/E ratio can vary, since faster-growing companies typically command higher multiples, while those with more uncertainty or lower expected growth trade at discounts. Other factors such as overall risk profile, profit margins, and size also play a role in where a company’s P/E should land relative to industry peers.

Microsoft’s current P/E ratio is 35.2x. For context, this is slightly above the Software industry average of 33.5x and in line with the peer group average of 36.0x. However, rather than just comparing to the industry or peers, Simply Wall St’s proprietary Fair Ratio builds in a broader perspective. This model calculates that, given Microsoft’s earnings growth, profit margin, size, and unique risk characteristics, a “fair” P/E for the stock should be 57.4x, which is considerably higher than both its current multiple and those of peers.

Because the Fair Ratio accounts for Microsoft’s future potential and risks in a way that simple benchmarks cannot, it provides a more holistic view of value. Comparing the Fair Ratio to Microsoft’s actual P/E suggests the stock is undervalued on this metric, as it is trading well below what would typically be justified by its fundamentals.

Result: UNDERVALUEDNasdaqGS:MSFT PE Ratio as at Nov 2025

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1398 companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Microsoft Narrative

Earlier we mentioned that there’s an even better way to understand valuation, so let’s introduce you to Narratives. A Narrative is your personal story about a company, connecting your own view of Microsoft’s future (like its growth, profitability, and risks) directly to your financial forecast and fair value estimate.

This approach moves beyond just the numbers, allowing you to articulate why you think Microsoft is set to thrive or face headwinds, and see how your assumptions translate into a fair value. Narratives on Simply Wall St’s Community page (used by millions of investors) are easy to use, interactive, and update automatically whenever fresh news or earnings reports are released. This helps keep your investment thesis relevant.

By comparing your Narrative’s Fair Value to the current Price, you’ll make clearer, fact-based decisions about when to buy or sell, grounded in both data and your convictions. For example, one Microsoft Narrative expects robust cloud and AI adoption to drive future earnings and assigns a bullish fair value of $626 per share. Another, factoring in competition and AI cost risks, sets a more conservative fair value near $333 per share, showing just how different outlooks can be.

For Microsoft, however, we will make it really easy for you with previews of two leading Microsoft Narratives:

🐂 Microsoft Bull Case

Fair Value: $500.00

Undervalued by 0.6%

Revenue Growth Rate: 6.75%

This view argues that after the initial AI excitement, Microsoft faces significant challenges, including a shrinking PC market, competition from Apple in the enterprise sector, and a struggling gaming division. It highlights high financial and strategic risk in Microsoft’s aggressive AI and cloud investments, especially due to the company’s reliance on OpenAI and substantial datacenter spending. The narrative warns of internal morale issues resulting from ongoing layoffs and suggests that these factors could impact long-term innovation and growth despite the company’s current industry leadership.

🐻 Microsoft Bear Case

Fair Value: $333.48

Overvalued by 49%

Revenue Growth Rate: 9.5%

This perspective sees Microsoft as well-positioned for sustained growth, supported by the integration of AI into its productivity suite, strong Azure expansion, and growing Teams adoption. It forecasts strong revenue and profit margin increases backed by cloud and AI monetization, with planned share buybacks intended to enhance shareholder returns. The narrative notes risks such as competitive pressure in cloud and productivity services and regulatory concerns, but it expects Microsoft to remain a leader in enterprise AI and cloud markets.

Do you think there's more to the story for Microsoft? Head over to our Community to see what others are saying!NasdaqGS:MSFT Community Fair Values as at Nov 2025

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Companies discussed in this article include MSFT.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email [email protected]

View Comments