Chuck Carnevale

About the Author Chuck Carnevale

Charles Carnevale attended the University of Tampa in the 1970s, and while at UT, his economics professor presented a thesis that stated, "Earnings determine the market price of a publicly traded company in the long run." This idea lodged itself in Chuck's mind and became his life's work. After meeting Julie Carnevale, his wife and business partner, they began working together to develop their ideology based on the idea that earnings determine market price. Together they were graphing thousands of companies when they realized that they had discovered the truth of the thesis that there existed a strong relationship to earnings and market prices in the long run. In 1992, they hired Tim Loudin, an information technology specialist that possessed the programming skills necessary to automate the Carnevale's research needs. Chuck's vision was developed into what is now the F.A.S.T. Graphs™ cloud-based software. F.A.S.T. Graphs™ has become the tool Chuck had been looking for all along. Within a matter of minutes, Chuck could examine the relationship of operating results to price performance on thousands of companies. F.A.S.T. Graphs™ has access to 20 years of the necessary historical data on thousands of domestic and Canadian public companies. The F.A.S.T. Graphs™ tool takes all the hours of manual graphing of business fundamentals and reduces it to seconds, giving you critical information in an instant. This charting tool has been used by Chuck, Julie and Tim for a number of years, and they decided to create an online forum to allow every investor the opportunity to use this unique tool.

Microsoft (MSFT): Great Company, But Stock Is Fully Valued

Despite all the positive results and good news surrounding MSFT, I consider the stock dangerously overpriced.


Microsoft (NASDAQ:MSFT) reported strong 4th quarter and fiscal year 2018 earnings.  The company’s earnings per share beat the analyst estimates by $.05 and their revenue of $30.09 billion beat analyst estimates by $860 million.  All in all, it was a great quarter and investors initially responded positively in after-hours trading.

Clearly, there was an awful lot to like about the quarter with many segments producing extraordinary growth and positive performance.  Nevertheless, despite all the positive results and good news surrounding the company and its largest quarter of the year, I consider the company’s stock dangerously overpriced.  However, I would also add that I really like Microsoft the business and its prospects for growth going forward.  In other words, what I don’t like about Microsoft’s stock price today has little to do about the company and everything to do about the way I believe the market is irrationally pricing the stock.

The Numbers Don’t Lie

Since the beginning of calendar year 2013 Microsoft has been one of the best performing stocks in the market.  On December 31, 2012 Microsoft’s price was $26.71 and its P/E ratio was 9.8.  However, as of yesterday’s close Microsoft’s price was $104.40 and its blended P/E ratio is 27.2.  To put that into perspective, Microsoft’s stock price has increased almost fourfold and its P/E ratio has almost tripled.  Additionally, non-GAAP earnings came in at $3.88 exceeding consensus estimates of $3.83 by $.05 per share.  Likewise, diluted earnings (GAAP) came in at $2.13 versus consensus estimates of $2.06.

Regardless of these great results, I consider Microsoft a dangerously overvalued stock for the long-term prudent investor.  My reasoning is simple and straightforward, Microsoft’s results do not support the high multiple that the market is currently placing on the shares, nor does it support the multiples that the market has been applying over the last several years.

In short, Microsoft has recently been a momentum stock which has been great for active traders in recent years.  On the other hand, an overvalued momentum stock like Microsoft is today can be very dangerous to prudent long-term investors.  It is my opinion, and history supports it, that the company’s stock price will inevitably move into alignment with the company’s intrinsic value.  My current optimistic assessment of Microsoft’s intrinsic value would be between $68-$70 per share.  Mathematically, this would indicate that Microsoft’s stock price is 35 to 40% overvalued.

In the following FAST Graph analyze out loud video I will clearly and vividly illustrate how and why I believe Microsoft’s stock price is overvalued despite its excellent results.  As I’ve often stated, measuring performance without simultaneously measuring valuation is a job half done.  This simply means that it is very easy to become enamored by a stock that has been performing well.  Everybody loves it when their stock is rising in value.  However, prudence dictates that it is very important to keep the company’s stock value in perspective to the company’s intrinsic value.

Summary and Conclusions

In Conclusion, I really like the business results that Microsoft has recently generated.  Considering that the company is an $800 billion Goliath, recent historical operating earnings growth between 8 and 10% is nothing short of extraordinary.  Moreover, I am also very impressed that the consensus of leading analysts expects Microsoft to generate double-digit earnings growth over the next 3 to 5 years.  If AAA rated Microsoft achieves these growth forecasts, it would be nothing short of extraordinary.

Nevertheless, as a prudent investor it’s critically important to recognize – within reason at least – whether the investment in a given stock makes economic sense.  Despite all these impressive results, I do not believe that an investment in Microsoft makes economic sense today.  In other words, I do not think it’s a good buy at its current quotations.  If I was a long-term shareholder I would at least consider taking some of my investment off the table.

In closing, I would really love to have Microsoft in my portfolio as a long-term position.  However, I believe the market is applying too high a valuation for me to even consider investing in this great business.  So, to be clear, I love the company but I hate the valuation I would have to pay to be able to invest in it.

Disclosure:  No position at the time of writing.


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