Quality Equities
Quality Equity Investor, Concentrated Portfolios
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 on sale even as its business runs hotter than ever, with fears over capex and AI fatigue driving a roughly 20% drop this year. Microsoft Cloud crossed $50B a quarter and Azure grew 39%, with 17% revenue growth, 46% operating margins and a $625B commercial backlog up 110%. The capex is reinvestment in high-return infrastructure, and at today's multiples buyers pay a fair price for an elite compounder whose durable cash flows remain when the capex noise fades. x.comÂ
Microsoft, one of the best businesses in the world, now trades at 19x forward earnings, the kind of valuation where quality investors start buying. 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 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
Microsoft's salesforce and governed platform unlock AI spending at conservative firms. Faster enterprise than consumer AI adoption makes it effectively the only pure play. M365 Commercial may top 20% growth next quarter, sooner than expected on tonight's guide; GitHub resegmentation helps, but it should do so this year anyway. Azure and M365, two-thirds of revenue, should grow above 50% and 20% and may accelerate. $24-25 CY27 EPS remains achievable, implying under 22x forward earnings. x.com … Show more
Azure's accelerating growth and better returns per capex dollar leave further upside on the table for Microsoft, the favored hyperscaler. Azure grew 48% versus 44-45% guidance, its fifth straight beat. The stock is holding eight-week EMA support, with the blue candle still intact. x.comÂ
Microsoft is not cheap even after a 20% drop: it fails a strict 20% margin-of-safety valuation hurdle. x.comÂ
Microsoft is undervalued at 26x earnings versus its historical level around 35x, implying 35% upside to a fair value of about $573 for a great business. 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
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 underpriced relative to its fundamentals, which is why Bill Ackman sold Google to buy it. Its P/E has compressed to 23x, the lowest in years, while Azure grows 39% year over year and AI revenue runs at $37 billion annualized, up 123%. A $625 billion revenue backlog supports demand, and $190 billion of capex points to future dominance, not recklessness. x.comÂ
