Above the Clouds: A Microsoft Stock Analysis

Ticker: MSFT
Sector: Technology
Industry: Software Infrastructure
Headquartered: Washington, USA
Moat: Wide: Switching Costs, Network Effects, Scale

Action at date of this post

Accumulate as of 04.04.2024
This is technically a buy opinion. Accumulate means if you are an investor that buys periodically then keep buying. If you do not own it, but are looking to buy, this is an indication to open a position of no more than 25% of your intended, total position then accumulate shares over a set time frame.

Fair Value Analysis

I do a fair value analysis on every stock in two ways. The first is the Discounted Cash Flow (DCF) method which I use for most stocks. I also run the Peter Lynch Fair Value method on stocks as well. I like running both as there are times where one way is more meaningful than the other depending on the stock.

Microsoft Corporate Overview

Microsoft Corporation, a global technology leader founded in 1975 by Bill Gates and Paul Allen, has emerged as a cornerstone of the modern digital landscape. Renowned for its innovative software products and services, Microsoft operates through three primary segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.

Within the Productivity and Business Processes segment, Microsoft offers a suite of productivity tools such as Microsoft Office, LinkedIn, and Dynamics CRM. The Intelligent Cloud segment encompasses Azure, a leading cloud computing platform, as well as server products and enterprise services. Additionally, the More Personal Computing segment includes Windows, Xbox, Surface, and Bing search engine.

With a steadfast commitment to innovation, Microsoft has positioned itself at the forefront of transformative technologies including artificial intelligence, mixed reality, and quantum computing. This strategic focus, coupled with robust financial performance, has fueled Microsoft’s sustained growth and profitability. As a result, Microsoft remains a stalwart investment choice, continuously adapting to meet evolving market demands while delivering substantial value to shareholders.

Microsoft Segment Analysis

Microsoft reports in three segments – Productivity and Business Processes which comprises things like LinkedIn and Office Commercial(~30%), Intelligent Cloud which includes Azure and servers (~40%), and More Personal Computing which includes Windows and Gaming and peripherals (~30%). 

Microsoft Wide Moat Source

Microsoft is one of few companies on the planet with a wide moat across all of its operating segments. Microsoft maintains structural advantages when it comes to Azure. With its massive installed base of Windows and Office it makes for near seamless effort to move to cloud. To that end, the company maintains high switching costs across its major revenue centers as well as significant network effects.

Growth Outlook

Microsoft is well into reinventing itself as a cloud and AI powerhouse. It’s significant investment into Open AI and its Azure product, we can see a direction for the company’s future. Consider that Azure grew at 30% for fiscal year 2023. The company’s built in competitive advantage is its massive installed base of legacy products. These can all be seamlessly moved to the cloud. 

With the traditional on-premises installed software moving to SaaS solutions and gaming heading toward recurring revenue the company has stable revenue pathways. The network effect that drapes over the company’s legacy products in Windows and Office allows for stable, large cash flows that makes building the cloud future much easier than any competition. 

Then there is LinkedIn with 600 million registered users giving the company the premier tool for business networking. 

The bottom line is that the company’s ecosystem is broad and deep. 

The Numbers

Consistently high ROCE and ROIC paired with envious margins has proven out in the stock price over the long-term. Debt is reasonable with a healthy overall balance sheet. And, what tech investors love to see, expanding CAPEX. With it’s ability to to generate returns on capital, I want to see CPAEX spending. Spending now with it’s return generation means happy investors down the road. Cash conversion although slowing is still in rarefied air.

This website and associated newsletter along with its content/links are not financial advice. Nothing in this newsletter is an investment recommendation. All content is created for entertainment, educational, or informational purposes only. My strong buy, accumulate, hold, reduce or sell opinions are exactly that – opinions. Be sure to do your own research for your own particular circumstances or higher a professional advisor.

At the time of writing this post, the author does have a position in MSFT.