Vlad Bastion
Founder of Investment Bastion, Systematic Stock Ratings & Algorithmic Portfolios
Microsoft is expensive on cash flow even though its 19-22x forward P/E looks like a 40% discount to its 10-year average. Its 2.0% forward free-cash-flow yield sits below the 3.3% 10-year median, and at this point in the cycle earnings multiples mislead while free cash flow is what the market actually prices. x.comÂ
Meta's falling free cash flow should keep its shares in a downtrend toward the 200-week moving average, as Microsoft and Alibaba fell this year on their own FCF declines. Meta should soon reach a buy zone and bounce, as Microsoft has. x.comÂ
Microsoft is not cheap even after a 20% drop: it fails a strict 20% margin-of-safety valuation hurdle. x.comÂ
Microsoft's valuation is starting to look attractive at about 22x forward earnings, a 4.5% earnings yield, for a pristine, wide-moat compounder with secular tailwinds. It remains a cash machine, funding heavy AI and infrastructure spending from its own operations while still generating plenty of free cash flow, without borrowing or issuing stock, even with shares down double digits this year. x.comÂ
Microsoft is cheap but not a long-term holding, because it is not growing fast enough while Nvidia is cheaper, growing much faster and better positioned. Microsoft may be re-rating, but the backdrop could also push it to a 15x P/E, so for now it is only a tradable situation. x.comÂ
Microsoft is a great business but still an expensive bet at $385, because heavy AI capex is eroding free cash flow. Capex was revised to $190B for the year, $43B above expectations, and free cash flow fell to $15.8B. Revenue grew 18% to $82.9B, operating income 20%, Azure 40% and AI run rate reached $37B, with a 47% operating margin. The average analyst target of $560 implies 45% upside only if the AI spending converts on schedule. x.comÂ
Microsoft's 50% Azure growth and prospect of positive cash flow in 2027 make the stock look bulletproof. Headcount cuts, lower Anthropic spend, a better Copilot routed to cheaper tokens, and coming proprietary chips and model usage add to the case. It should get Apple's multiple plus recognition for cybersecurity. x.com x.comÂ
Microsoft and the other megacaps apart from Nvidia deserve to trade where they are, because multi-trillion-dollar companies can't outperform the market when they are on the verge of reporting zero free cash flow. x.comÂ
Microsoft is losing ground in fast AI innovation and is not cheap enough to compensate. Copilot was strong a few months ago but is no longer competitive in an agent-driven world, and the stock closed below its 200-week moving average for the first time since 2013. At about 21x forward EPS for 22% growth it is solid but not cheap, and compared with Nvidia there is little argument for allocating even 1% of a portfolio to Microsoft. x.comÂ
Microsoft is undervalued alongside Meta and Nvidia, at 22.4 times forward earnings and a PEG ratio of 1.39. That compares with Alphabet at 30.8x, Apple at 30.9x and Amazon at 32.1x forward earnings, while Tesla at 180x is highly overvalued. x.comÂ
Shift4 is about five times cheaper than Microsoft on owner earnings. Owner earnings here are cash flow after stock-based compensation, deducting maintenance capex instead of depreciation and before growth capex, roughly what Shift4 could distribute to shareholders today if it skipped growth investment. x.com x.comÂ
