Microsoft (MSFT) Stock Looks Cheap On Earnings While Cash Flow Drives Debate

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Microsoft (MSFT) Stock Looks Cheap On Earnings While Cash Flow Drives Debate Bailey Pemberton Fri, July 10, 2026 at 3:13 PM EDT 4 min read MSFT Track your investments for FREE with Simply Wall St, the portfolio command center trusted by over 7 million individual investors worldwide. Microsoft stock has pulled back recently, yet valuation checks still point to a potential gap between its current price and an intrinsic value estimate built from a Discounted Cash Flow (DCF) model that screens the shares as undervalued. Microsoft has returned 42.5% over the past 5 years, which is a solid gain but not so extreme that valuation no longer matters for new money going into the stock. Heavy investment in AI, including the new Microsoft Frontier Company unit, can support long term cash flow expectations. At the same time, rising AI infrastructure costs and regulatory scrutiny around cloud and pricing may weigh on how much of that spending turns into shareholder value. On Simply Wall St's broader checks, Microsoft is assessed as undervalued in 6 of 6 areas. This suggests the stock currently leans cheap across both its DCF based intrinsic value estimate and its market multiples. The issue now is whether Microsoft's recent share price weakness has gone far enough to align the stock with its intrinsic value, or if the discount implied by the valuation models still looks meaningful. Find out why Microsoft's -22.7% return over the last year is lagging behind its peers. The Discounted Cash Flow (DCF) model values Microsoft by projecting future free cash flows and discounting them back to today. On the latest figures, Microsoft generated about $93.7b in free cash flow over the last twelve months, and the 2 Stage Free Cash Flow to Equity model assumes that cash flows continue growing rather than shrinking over time. Based on those assumptions, the DCF model arrives at an estimated intrinsic value of about $561 per share. This output indicates the stock is roughly 31.5% undervalued compared with the current market price. Heavy AI and data center spending, including the $2.5b Microsoft Frontier Company initiative and related infrastructure buildout, helps explain why the market is debating cash flow durability even as the model still supports a higher value. Overall, the DCF workup indicates that Microsoft stock currently appears undervalued relative to its projected cash flows. Our Discounted Cash Flow (DCF) analysis suggests Microsoft is undervalued by 31.5%. Track this in your watchlist or portfolio , or discover 44 more high quality undervalued stocks . Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Microsoft. The P/E ratio is a useful way to cross check what you are paying for each dollar of Microsoft earnings. Microsoft currently trades on a P/E of 22.8x, compared with a Software industry average of 29.3x and a peer group average of 28.1x, so the stock is priced below both benchmarks. On Simply Wall St's fair multiple framework, which factors in Microsoft's size, margins, sector, growth profile and risks, the stock screens on a fair P/E of 42.2x. That is well above the current 22.8x, indicating a sizeable discount even after the recent pullback. In other words, the wider market is valuing Microsoft below what this model suggests would be typical for a company with its characteristics. On earnings multiples alone, Microsoft stock appears undervalued relative to both sector peers and its modelled fair P/E. See what the numbers say about this price — find out in our valuation breakdown. Simply Wall St Narratives pick up where the Microsoft valuation work leaves off by spelling out which growth, margin and earnings paths would need to play out for the stock to be worth materially more or materially less than today's price, and they sit on the company's Community page. Rather than relying on a single multiple or model output, each narrative lays out its own fair value assumptions so you can compare them with Microsoft's actual results over time. Community investors looking at Microsoft are split between seeing a clearance sale and a fully priced giant with thinner cushions. "A business that generates $71.6 billion in free cash flow, maintains a 45.6% operating margin, earns roughly 28 cents of profit on every dollar of invested capital…" Read the full Bull Case to see why Microsoft could be undervalued "Calendar 2026 capex is projected at ~$190B (+61% YoY), with ~$25B driven by component cost inflation and roughly two thirds allocated to short lived compute assets…" Read the full Bear Case to see why Microsoft could be overvalued Do you think there's more to the story for Microsoft? Head over to our Community to see what others are saying! For Microsoft, both the Discounted Cash Flow (DCF) intrinsic value estimate and the market multiples currently point in the same direction, with the stock screening as undervalued rather than fully priced. The key question is whether heavy AI and data center spending ultimately sustains the cash flows and earnings power that these models assume, or whether rising costs and regulatory pressure keep more of that value from reaching shareholders. From here, the crux of the bull versus bear debate is how much of Microsoft's AI investment eventually translates into durable, high quality free cash flow. 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 editorial-team@simplywallst.com

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