Key Highlights

  • Microsoft (NASDAQ:MSFT) trades at a trailing price to Earnings ratio of 27.7x against a five-year average of 32.2x, and the scorecard rates the valuation attractive, scoring it 4 of 5, with the shares at USD 531.01.
  • Nvidia (NASDAQ:NVDA) has the lowest P/E of the four at 26.9x against an average of 59.6x, and the scorecard rates the valuation attractive, with the price of USD 213.17 below its USD 324 cheap marker.
  • Broadcom (NASDAQ:AVGO) carries a trailing P/E of 43.6x against an average of 52.7x, yet the scorecard scores the valuation Expensive at 2 of 5 and labels the stock Watch, summarising it as a great Business with a bad valuation.
  • Spotify Technology (NYSE:SPOT) trades at 32.8x earnings against an 89.0x average, the widest discount of the four, and the scorecard scores the valuation 4 of 5 but gives the label Watch because it rates the business only average.

Microsoft (NASDAQ:MSFT): Cheaper Than Its Own History

The scorecard applies trailing price to earnings to Microsoft (NASDAQ:MSFT) because it places the company in the Capital return phase, where profits are established. It reports 27.7x today against a five-year average of 32.2x. Simple arithmetic on those two published numbers puts the current multiple at about 86% of the average. The scorecard marks USD 545 as the cheap threshold, USD 617 as average and USD 688 as expensive, and the latest price shown is USD 531.01, below the cheap marker. Other multiples are 11.4x sales, 8.4x book and 65.8x free cash flow, so the earnings measure looks cheaper than the Cash Flow measure. The scorecard's label for Microsoft (NASDAQ:MSFT) is Buy, with a business composite of 4.5 out of 5, and its summary reads exceptional business, good valuation. That is the scorecard's output, not advice from us. The weak points are average growth, with Revenue up 17.9% over one year against earnings growth of 6.6% in the latest period shown, and a discount to a five-year average that does not guarantee a re-rating.

Nvidia (NASDAQ:NVDA): A Large Gap To The Average

The scorecard also uses trailing price to earnings for Nvidia (NASDAQ:NVDA), which it places in the capital return phase. The ratio is 26.9x against an average of 59.6x, and simple arithmetic on those two numbers puts today's multiple at about 45% of the average, the biggest gap in this comparison apart from Spotify. The valuation is rated attractive at 4 of 5. The price of USD 213.17 sits below the USD 324 cheap marker, with USD 472 as average and USD 619 as expensive. Other multiples are 17.0x sales, 22.4x book and 40.5x free cash flow. The scorecard does not say why the ratio is low, but earnings grew 125.4% in one year, which compresses a multiple unless the price rises as fast. Its label for Nvidia (NASDAQ:NVDA) is Buy, with a business composite of 4.3 out of 5. A low multiple on strong earnings can also reflect doubts about durability, and the scorecard rates risk high at 2 of 5, so the discount is not proof of mispricing.

Broadcom (NASDAQ:AVGO): Below Average But Still Expensive

Broadcom (NASDAQ:AVGO) shows why a multiple below its own average is not the whole story in the scorecard. As a phase 4 company it is judged on trailing price to earnings, which stands at 43.6x against an average of 52.7x. Simple arithmetic on those two numbers puts the multiple at about 83% of the average, a slightly wider discount than Microsoft's 86%, yet the valuation scores 2 of 5, Expensive. The scorecard's bar runs from USD 217 to USD 609 across its zones, with shares at USD 341.40 when it was written. Other multiples are price to sales of 18.3x, price to book of 16.3x and price to free cash flow of 41.4x, with a Dividend Yield of 0.7% and a total Shareholder yield of 1.5%. The label for Broadcom (NASDAQ:AVGO) is Watch, with a business composite of 4.3 out of 5. These are the scorecard's inputs, and another method could reach a different view.

Spotify Technology (NYSE:SPOT): Cheap Multiple, Average Business

Spotify Technology (NYSE:SPOT) has the widest discount to its own average in this comparison. The scorecard places Spotify in phase 3 and uses trailing price to earnings, which is 32.8x against an average of 89.0x. Simple arithmetic on those two numbers gives about 37% of the average. The valuation scores 4 of 5, Attractive, with markers at USD 827 and USD 2,023 and the shares at USD 526.08, below both. Other multiples are price to sales of 5.1x, price to book of 11.3x and price to free cash flow of 28.5x. The comparison depends on the period, because the scorecard's chart spans two years in which earnings were near zero or negative for part of the time, which inflates past ratios. The label for Spotify Technology (NYSE:SPOT) is Watch rather than Buy because the business composite is only 3.3 out of 5, with a Thin moat. The scorecard's summary is an average business with a good valuation, and it is not advice from us.

Where Things Stand

The scorecard gives Buy to Microsoft and Nvidia and Watch to Broadcom and Spotify because it weighs business quality and valuation together, not P/E alone. Trailing P/E ranges from 26.9x at Nvidia (NASDAQ:NVDA) to 43.6x at Broadcom, with Microsoft at 27.7x and Spotify at 32.8x. Broadcom (NASDAQ:AVGO) is rated Expensive despite a discount to its average, while the valuation at Spotify is rated Attractive but its business is rated average. These are the scorecard's outputs, not our recommendations. Different averages, periods and earnings quality can change each reading, so readers can check the next quarterly results from Microsoft (NASDAQ:MSFT) and the others.