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Microsoft: The greatest stock in the world?

Opdateret: 27. jan.


Some refer to Microsoft as the greatest stock in the world. I understand why some refer to Microsoft that way, as it is one of only two companies with an AAA credit rating (the other being Johnson & Johnson). Microsoft has delivered tremendous growth over the years, and their products are expected to be in demand for years to come. The question is, is now the time to buy the stock? In this analysis, I will attempt to answer that question.


This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.


Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.


For full disclosure, I should mention that at the time of writing this analysis, I do own Microsoft stocks. Microsoft currently represents 2,57% of my copy trading portfolio. If you would like to copy the portfolio or view the stocks I hold, you can find instructions on how to do so here. I view Microsoft as a long-term investment and do not anticipate closing my position in the near future. Despite being the owner of Microsoft, I will ensure that this analysis remains unbiased. If you want to purchase shares or fractional shares of Microsoft, you can do so through eToro. eToro is a highly user-friendly platform that allows you to start your investing journey with as little as $50.



Microsoft is a multinational technology company based in the United States. I will not delve into extensive details about the company, assuming that everyone is already familiar with it. However, one should be aware of the various business segments within the company. Microsoft operates and reports its financial performance using the following business segments: Productivity and Business Processes (33% of revenue), Intelligent Cloud (41% of revenue), and More Personal Computing (26% of revenue). In short, the Productivity and Business Processes division includes Office 365, LinkedIn, and cloud-based applications. Intelligent Cloud includes Azure, as well as support and consulting services. More Personal Computing includes Windows, devices, gaming, and search advertising. Regarding Microsoft's moat, I believe that they have several moats. The most obvious moat is the brand moat, as it is a well-known brand that consumers trust. Microsoft certainly also has a switching moat, as switching to a competitor in most cases is not worth the hassle. Later, we will investigate the numbers, but let us first take a look at their management.

Their CEO is Satya Nadella. Before joining Microsoft in 1992, he worked at Sun Microsystems. He held several positions at Microsoft before becoming CEO in 2014 and Chairman of the Board in 2021. He has a BA in Electrical Engineering, an M.S. in Computer Science, and an MBA. Since becoming the CEO, he has transformed Microsoft's culture by emphasizing empathy, collaboration, and a growth mindset. He has often been described as an exceptional CEO who is highly regarded by his employees. According to Barrons, he has performed very well. Since he became CEO, the stock has increased by more than 700%, and nearly 90% of Microsoft's current value has been generated under his leadership. It makes him one of the greatest value-generating corporate leaders of all time. His credentials inspire great faith in Satya Nadella's leadership, and I firmly believe that he is the ideal person to propel Microsoft's growth in the future.


Microsoft has a strong brand and switching moats. I really like the management too. Now, let us analyze the numbers to determine if Microsoft meets our criteria for having a strong moat. In case you want an explanation of what the numbers represent, you can refer to "MY STRATEGY" on the website.


The first number we will look into is the return on invested capital, also known as ROIC. We require a 10-year history and all years must have numbers above 10%. Microsoft has consistently delivered an impressive return on invested capital (ROIC), surpassing expectations every year for the past decade. It is encouraging to see that the Return on Invested Capital (ROIC) has been consistently above 20% since 2019. Furthermore, Microsoft managed to increase its ROIC year over year until fiscal 2023, which has been a challenging year for most companies. I'm happy to see numbers like these.



The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. Overall, the numbers look good, despite some years where the equity dropped slightly. As with the ROIC, it is very encouraging to see that Microsoft's performance took a step up in 2019 and has increased every year since.



Finally, we will investigate the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has remaining after paying all of its financial obligations. I use margins to provide a clearer understanding. Free cash flow yield refers to the amount of free cash flow per share that a company is projected to generate in relation to its market value per share. Not surprisingly, Microsoft has maintained a positive free cash flow every year for the past 10 years. The most encouraging thing is that Microsoft has consistently increased its free cash flow year over year from 2015 until 2022. 2023 has been a challenging year due to macroeconomic factors. Thus, I'm not worried that free cash flow decreased slightly in 2023, as Microsoft still managed to deliver the second-highest free cash flow in the past decade in 2023. Levered free cash flow margin has also consistently remained high over the past 10 years. The free cash flow yield has been relatively low in the last five years, indicating that Microsoft is currently trading at a high price. However, we will discuss this further later on.



Another important aspect to investigate is the level of debt, specifically whether a business has manageable debt that can be paid off within a period of 3 years. We do this by dividing the total long-term debt by earnings. After performing the calculation in Microsoft, I can see that the company has 0,58 years of earnings in debt, which is very encouraging to see. With a AAA credit rating, debt wasn't going to be an issue, but it is still nice to see the numbers.



Obviously, Microsoft is a great company, and it will most likely continue to grow due to its innovation and strong competitive advantages. However, no investment is free from risk, and investing in Microsoft is no exception. The most obvious risk is competition among the various sectors in which Microsoft operates. Some of their competitors in various business segments are among the world's top companies, including Apple, Google, and Sony. Therefore, it is important to have a strong moat, like Microsoft does.Another potential risk could be facing another antitrust lawsuit, as we have witnessed in the past. Right now, it seems that the U.S. government is primarily focusing on companies such as Apple, Amazon, Google, and Facebook, while Microsoft appears to be avoiding scrutiny for the time being. However, as I have written about previously, with Lina Khan assuming the role of Chairperson of the Federal Trade Commission, I anticipate a rise in antitrust law cases in the United States in the coming years. Given Microsoft's continuous growth, it may become increasingly challenging to evade such cases in the future. Furthermore, Microsoft could also face antitrust scrutiny in other regions of the globe. Lately, we received news that the European Commission has initiated a formal investigation to evaluate whether Microsoft may have violated EU competition regulations. Macroeconomics. As I write this, a recession is looming on the horizon. During the dotcom bubble bust and financial/banking crises, Microsoft, like all stocks, experienced a drop in value, although it performed better than the S&P 500. However, this time might be different, and we don't know if companies will transition to the cloud or if consumers will continue to buy Microsoft products. Macroeconomics may only pose a short-term risk, but it is still something to consider when investing in Microsoft.


There are also plenty of reasons to invest in Microsoft. One reason is that Microsoft is expanding its largest business segments. Microsoft continues to grow its largest business segments. In fiscal 2023, Microsoft grew its Productivity and Business Processes revenue by 9% and its operating income by 15%. The revenue from Intelligent Cloud grew by 17%, and the operating income increased by 14%. More Personal Computing had a challenging year, with a 9% decrease in revenue and a 20% decline in operating income. However, overall, Microsoft still managed to grow its revenue by 7% and operating income by 6% year over year. Artificial Intelligence (AI). Microsoft can benefit greatly from AI in years to come. Not only does Microsoft own 49% of OpenAI, but they are also implementing AI solutions in their products. They have introduced Microsoft Copilot, an AI companion that will be integrated into all of Microsoft's applications and experiences. Microsoft Copilot will increase productivity for customers, which is why Microsoft will charge a $30 monthly fee per user for Copilot, meaning it will significantly boost the recurrent revenue. Metaverse, LinkedIn, and Cybersecurity. I group these three together as they are all businesses that CEO Satya Nadella has been bullish on. Microsoft believes that the Metaverse can be the next wave of the internet. They describe the first wave as the era when people were allowed to build websites. The next wave, according to Microsoft, is the era in which individuals can create their own Metaverse. Satya Nadella has referred to the Metaverse as "an opportunity in a very classic Microsoft sense." LinkedIn continues to experience significant growth, with revenue surpassing $15 billion. Additionally, membership growth has accelerated for the past 8 quarters. Satya Nadella has said, "I'm very, very bullish on LinkedIn." Microsoft has made significant investments in cybersecurity to offer their customers a superior product. When asked about monetizing cybersecurity, Satya Nadella responded, "We will definitely monetize those aspects where we have the best-of-breed solutions."



Now it is time to calculate the price of shares in Microsoft. I perform three different calculations that I learned at a Phil Town seminar. The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 9,68, which is the one from fiscal 2023. I have selected a projected future EPS growth rate of 13%, which is in line with the analysts' consensus at Finbox. Additionally, I have chosen a projected future P/E ratio of 26, which is twice the growth rate. This decision is based on the fact that Microsoft has historically had a higher P/E ratio. Lastly, our minimum acceptable rate of return is already set at 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $178,36. We want to have a safety margin of 50%, so we will divide it by 2. This means that we want to buy Microsoft at a price of $89,18 (or lower, obviously) if we use the Margin of Safety price.


The second calculation is called the Ten Cap price. The rate of return that an owner of a company (or stock) receives on the purchase price of the company is essentially its return on investment. The return should be at least 10% annually, and I calculate it as follows: The operating cash flow last year was 87.582 and capital expenditures were 28.107. I attempted to review their annual report to determine the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated for maintenance purposes. This means that we will use 19.675 in our calculations. The tax provision was 16.950. We have 7.432 outstanding shares. Hence, the calculation will be as follows: (87.582– 19.675 + 16.950) / 7.432 x 10 = $114,18 in Ten Cap price.


The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Microsoft's Free Cash Flow Per Share at $8 and a growth rate of 13%, if you want to recoup your investment in 8 years, the Payback Time price is $110,21.


I believe that Microsoft is a great company with excellent management. I also appreciate their AAA rating, and given their previous experience with an antitrust law case, they may be able to avoid similar issues in the near future. Their competitors are some of the best companies in the world, so they will need to continue innovating to grow their business. They may also expand their business through acquisitions, such as their acquisition of Activision Blizzard. AI is still new, and it can be challenging to fully understand its potential. However, it has the potential to significantly boost Microsoft's profitability in the future. I feel very confident in the management's ability to grow the company moving forward, as the CEO has a proven track record. There are no investments that are 100% safe in the world, but in my opinion, Microsoft is one of the companies that comes close to being one due to its excellent management, significant competitive advantage, and top credit rating. I typically target a 50% discount to the intrinsic value when buying stocks. However, in certain cases, it is more advantageous to purchase a high-quality company at a fair price. I believe that Microsoft is a good buy as long as it is priced below $228. This would indicate that it is trading at its intrinsic value based on the Ten Cap price. The amount of discount you would like on the intrinsic value is up to you.


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My personal goal with investing is financial freedom. It also means that to obtain that, I do different things to build my wealth. If you have some extra hours to spare each month, you can turn a few hours a week into a substantial amount of money in a few years. If you are interested to know how to do it, you can read this post.


I hope that you enjoyed my analysis. Unfortunately, I cannot do a post of all the companies I analyze. I am available to copy but if you do your own trades, you can follow me on Twitter instead, as I tweet when I buy or sell anything.


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