(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Microsoft Corp. (MSFT) shares have risen by about 11 percent since February 8 and have had an incredible run over the past 52-weeks, with the stock increasing by around 46 percent, as optimism continues to grow regarding Microsoft's cloud business and the Office 365 subscription service. Despite the monster gains, on average analysts are looking for shares to head even higher, by 11 percent, according to Ycharts. 

Microsoft doesn't have the blistering growth of an Amazon.com Inc. (AMZN ) or Netflix Inc. (NFLX), but then again Microsoft comes a deep discount to those two stocks. But that lack of growth may also be a key reason why Microsoft shares are too expensive currently, trading at almost 24 times 2019 earnings estimates of $3.94.

MSFT Chart

MSFT data by YCharts


Of the top 25 holdings in the iShares Technology ETF (XLK), the average one-year forward P/E ratio for those stocks is about 21, and that makes Microsoft more expensive than the average. But still, analysts are looking for shares of Microsoft to rise another 11 percent from its current price around $94.25 to $104.67, based on data from Ycharts. That would raise Microsoft valuation to roughly 26.5 times 2019 earnings estimates. Of the 35 analysts that cover Microsoft 80 percent rate the stock a "buy" or "outperform" while six have a "hold" and one stands at a "sell."

Slow Earnings Growth

Analysts have been steadily raising their revenue estimates for the company. Since Septemeber revenue estimates for 2018 have risen by about 2.7 percent to $107.42 billion, 2019 estimates have increased 4 percent to $116.58 billion. Based on current forecasts, revenue is expected to grow by 11 percent in 2018 and 8.5 percent in 2019.

MSFT Revenue Estimates for Current Fiscal Year Chart

Slow Earnings

Earnings estimates have also increased substantially, with 2018 earnings estimates rising by nearly 13 percent to $3.64, and by almost 9 percent for 2019 to $3.94. Despite the recent improvement in the earnings forecast, it only results in 2018 earnings growth of 9.9 percent an 8.2 percent in 2019.

MSFT EPS Estimates for Current Fiscal Year Chart

Deteriorating Margins

Revenue is expected to grow faster than earnings, and that likely means the street is also forecasting tighter gross margins, making it even harder for Microsoft to achieve the earnings growth currently projected. In fact, Microsoft's gross profit margins have been steadily declining since 2010, when they once stood around 80 percent, versus 2017's 62 percent.

MSFT Gross Profit Margin (Annual) Chart

It would suggest that analyst's price objectives may be too bullish on Microsoft's stock price. There is always the chance the company can surprise investors and beat estimates, boosting growth and reducing the valuation,  but it makes the hurdle that much harder.

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdingsInformation presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.