Microsoft Stock Under Fire as Price-to-Earnings Ratio Reaches New Heights
Microsoft's stock price has been underperforming compared to its peers and the broader market. Despite running the highest operating margin in its peer group, Microsoft's shares have returned -0.5% over the past twelve months, while the S&P 500 index has risen by 18.5%. The company's stock trades at a premium price-to-earnings (PE) ratio of 27.8 times earnings, making it one of the most expensive stocks in its group.
Microsoft's high operating margin is due to its ability to grow revenue faster than its rivals. However, this growth comes with a cost - the company has been investing heavily in its cloud services, including Azure and Microsoft 365 Copilot. In fiscal Q4 2026, Microsoft added 31 new data centers and spent $35.8 billion on capital expenditures, which reduced free cash flow to $19.6 billion.
Management has set a target for fiscal 2027, aiming for another year of double-digit revenue and operating income growth, with full-year operating margins down less than one point. Meeting this target would demonstrate Microsoft's self-funding capability during the deployment of its infrastructure investments. However, if the company falls short, it may indicate that the trailing twelve months of underperformance are structural rather than temporary.
The operating record is settled, but what is in dispute is the price. Investors must decide whether to pay up for a margin that goes into the buildout. The key investment premise rests on whether Microsoft can maintain industry-leading operating profitability through an unprecedented capital investment cycle - a challenging but historically defended benchmark.