Key Highlights

  • Against a five-year average of 32.2x, Microsoft (NASDAQ:MSFT) has a trailing price to Earnings ratio of 27.7x, which the scorecard calls attractive with a valuation score of 4 of 5 at the USD 531.01 share price.
  • The lowest P/E of the group, 26.9x against an average of 59.6x, belongs to Nvidia (NASDAQ:NVDA), and the scorecard calls that valuation attractive because the USD 213.17 price sits under its USD 324 cheap marker.
  • Even with a trailing P/E of 43.6x versus an average of 52.7x, Broadcom (NASDAQ:AVGO) gets an Expensive valuation score of 2 of 5 and a Watch label, and the scorecard sums it up as a great Business with a bad valuation.
  • The widest discount of the four, 32.8x earnings against an 89.0x average, is at Spotify Technology (NYSE:SPOT), where the valuation scores 4 of 5 yet the label is Watch, since the scorecard rates the business only average.

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

Because the scorecard puts Microsoft in the Capital return phase, where profits are established, it judges Microsoft (NASDAQ:MSFT) on trailing price to earnings. Today's reading is 27.7x, set against a five-year average of 32.2x, and simple arithmetic on those two published numbers makes the current multiple about 86% of the average. Its price zones are USD 545 for cheap, USD 617 for average and USD 688 for expensive, while the latest price shown, USD 531.01, falls below the cheap marker. The earnings measure looks cheaper than the Cash Flow measure, given other multiples of 11.4x sales, 8.4x book and 65.8x free cash flow. For Microsoft (NASDAQ:MSFT) the scorecard output is Buy, backed by a business composite of 4.5 out of 5 and a summary that reads exceptional business, good valuation. That is the scorecard's output and not advice from us. Weak spots include average growth, as Revenue rose 17.9% over one year while earnings growth was 6.6% in the latest period shown, and a discount to a five-year average does not guarantee a re-rating.

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

Capital return is also the phase the scorecard assigns to Nvidia (NASDAQ:NVDA), so trailing price to earnings applies again. At 26.9x against an average of 59.6x, simple arithmetic on the two numbers leaves today's multiple at about 45% of the average, the largest gap here except for Spotify. A valuation score of 4 of 5 means attractive. Its zones are USD 324 cheap, USD 472 average and USD 619 expensive, and the USD 213.17 price is under the cheap marker. Sales, book and free cash flow multiples are 17.0x, 22.4x and 40.5x. Why the ratio is low is not explained by the scorecard, though earnings grew 125.4% in one year, and fast earnings growth compresses a multiple unless the price climbs as quickly. The label is Buy, with a business composite of 4.3 out of 5. Still, a low multiple on strong earnings may reflect doubts about durability, and with risk rated high at 2 of 5 by the scorecard, the discount at Nvidia (NASDAQ:NVDA) does not prove mispricing.

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

In the scorecard, Broadcom (NASDAQ:AVGO) shows that sitting under its own average multiple does not settle the question. As a phase 4 company it is judged on trailing price to earnings, which reads 43.6x versus an average of 52.7x. That is about 83% of the average on simple arithmetic, a slightly wider discount than the 86% at Microsoft, yet the valuation scores 2 of 5, Expensive. The bar runs from USD 217 up to USD 609 across its zones, and when it was written the shares stood at USD 341.40. Further readings include price to sales of 18.3x, price to book of 16.3x and price to free cash flow of 41.4x, alongside a Dividend Yield of 0.7% and a total Shareholder yield of 1.5%. Watch is the scorecard's label for Broadcom (NASDAQ:AVGO), and its business composite is 4.3 out of 5. All of this rests on the scorecard's inputs, so a different method could reach another view.

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

Of the four, Spotify Technology (NYSE:SPOT) shows the widest discount to its own average. The scorecard puts it in phase 3 and relies on trailing price to earnings of 32.8x against an average of 89.0x, which simple arithmetic turns into about 37% of the average. A score of 4 of 5, Attractive, goes to the valuation, with markers at USD 827 and USD 2,023 and shares at USD 526.08, under both. Price to sales is 5.1x, price to book is 11.3x and price to free cash flow is 28.5x. The period matters for this comparison, because the scorecard's chart covers two years in which earnings were near zero or negative for part of the time, and that inflates past ratios. Rather than Buy, the label for Spotify Technology (NYSE:SPOT) is Watch, as the business composite is only 3.3 out of 5 and the moat is Thin. An average business with a good valuation is how the scorecard summarises it, and that is not advice from us.

Where Things Stand

Business quality and valuation are weighed together by the scorecard, not P/E alone, and that is why Microsoft and Nvidia get Buy while Broadcom and Spotify get Watch. Trailing P/E runs from 26.9x at Nvidia (NASDAQ:NVDA) to 43.6x at Broadcom, with Microsoft at 27.7x and Spotify at 32.8x. Despite a discount to its average, Broadcom (NASDAQ:AVGO) is rated Expensive, and at Spotify the valuation is rated Attractive while the business is rated average. These are the scorecard's outputs, not our recommendations. Averages, periods and earnings quality can all shift a reading, so readers may look to the next quarterly results from Microsoft (NASDAQ:MSFT) and the others.