If You’re a Microsoft Shareholder… Get Ready! $MSFT

[00:00:00]If you own Microsoft, you've had one of the smoothest rides in the market for years until recently. The stock is down over 20% in the last year. The AI spending is enormous and investors are starting to ask the uncomfortable question. Is all that money actually going to pay off? But is the fear overdone or is it just getting started?

[00:00:21]Today we have three bull cases, three bare cases, and then we run the numbers and find out what Microsoft is really worth using our own process. But before we get into the bull and bear cases, let's answer the big question on every shareholder's mind. If Microsoft is such a great company, and here's the important part, this is not a the business is broken story. Not even close. This is the stock got too expensive and investors got impatient waiting for the AI payoff story. But I want to remind everybody in the short run stocks are a voting machine. In the long run they're a weighing machine. We are here to determine what is the weight. What are the fundamentals of this business in the long run? We don't care what happens in the short run. Look at how the business actually did in its most recent quarter though. revenue came in at nearly $83 billion.

[00:01:15]Net income was almost 32 billion. That is a net profit margin of 38% which is elite. That's after all overhead, all taxes, everything to run the business.

[00:01:27]Earnings per share came in at $427.

[00:01:32]and the cloud segment, Azure, AI, all of it brought in nearly $ 35 billion debt in just that one quarter. Guys, those are strong, healthy numbers that validate the fundamentals of the business and the growth of the fundamentals over time. The business is not in a decline. It is getting better.

[00:01:52]So again, people wonder why did the stock fall? Now, of course, people are going to attach it to a few reasons. The AI spending is massive and investors want receipts. Microsoft is guiding to $190 billion in capital expenditures for 2026 alone. Guys, let me repeat that.

[00:02:11]190 billion. That is a 61% increase over the last year. They spent nearly 32 billion in the last quarter alone, up 84% year-over-year. And there are talks that they plan to scale that to over 40 or $50 billion per quarter going forward. Twothirds of that money is going straight into AI hardware. Things like GPUs, custom chips, servers, and networking. Then 25 billion of that increase this year is just because the components got way more expensive. That is a staggering amount of money. And while Azure and AI revenue are growing, Wall Street is getting antsy. They want to see that money turn into profits, not just promises. But is that Wall Street being too shortsighted? That's the question you have to always ask. Another reason why I'm against short-term quarterly results driving investing decisions. At some point, I get it. Wall Street is going to ask, "Where's the money?" versus waiting, allowing people to keep saying, "It's coming. It's coming." Now, another important point I want to point out, the stock was priced for perfection. In my opinion, Microsoft became one of the poster children for AI, and the price reflected it. at over $555 a share. I believe that investors are paying up for a very solid and almost perfect future. When a stock is priced that high, good results are not good enough. Investors wanted a blowout every single quarter. And the moment anything came in merely strong instead of spectacular, people were spooked and they sold. That's what happens when expectations run ahead of reality. Now, there's also a growing debate about whether AI tools like C-Pilot are actually worth what Microsoft charges for them. The enterprise customers who wanted it first are already in. The question now is whether the average company, the one that's not a tech giant, sees enough value to pay extra per employee for an AI assistant baked into office. If adoption is slower than expected, that's a problem because a big chunk of the bullcase depends on co-pilot becoming a massive new revenue stream. Guys, my personal anecdote. My company uses Microsoft 365. We include Copilot in there. I pay extra for Claude. I still use Claude. Have I used Copilot? Absolutely. Has it been pretty good? Yes. For some reason, I just always gravitate to Claude. Okay. So, apart from my anecdote, apart from that, let's get into the bull cases. And there are three big reasons why the bulls believe Microsoft at these prices is a gift. Bullcase number one, Microsoft is the picks and shovels winner of the AI gold rush. What that means is when you go back to the gold rush of the 1840s and 50s, the people who made a ton of money were not the ones looking for gold. It was the ones selling the supplies, the picks and shovels to those gold people. They are the ones who made the fortune. The ladies who went there and sold pies to those people. So that's what they're saying. Microsoft is the picks and shovels winner of the AI gold rush. Now, here's the thing that most people miss. You don't have to pick which AI company wins. Microsoft is selling the tools to all of them. Azure is the cloud platform where companies build and run their AI. Thousands of startups and Fortune 500 companies run their AI workloads on Azure. It's like selling shovels during that gold rush.

[00:05:33]Like I mentioned before, you make money no matter who finds the gold. Azure is already growing 40% year-over-year, and the AI portion of that is accelerating, running at a $ 37 billion annualized rate and growing 100 123%.

[00:05:52]The bulls say Microsoft is building the infrastructure layer of the entire AI economy, and that's a position almost nobody else can match. Bull case number two, C-pilot could become the biggest software upsell in history. Microsoft already has something almost no other company on the planet has. Hundreds of millions of people already paying for their software through Microsoft 365.

[00:06:14]Yours truly included. That's an installed base that most companies would kill for. Now imagine Microsoft gets even a fraction of those people to add Copilot. An AI assistant built right into Word, Excel, Outlook, Teams, all of the software that Microsoft creates. You don't need everyone to say yes. Even modest adoption across that massive base turns into billions and billions of dollars in very very high margin recurring revenue. What could be better than that? High margin recurring revenue. The bulls say that this is the most obvious upsell opportunity in tech and it's barely even gotten started. And the third bullcase, Microsoft is one of the most diversified big tech companies out there and that is a fortress. Think about what Microsoft actually owns. Work tools doing 35 billion a quarter. That's Office, Teams, and LinkedIn. Cloud doing $35 billion a quarter. That's Azure and AI services. And then personal computing doing over $13 billion a quarter. That's Windows, Xbox, Activism, Blizzard, and some people consider Bing in there. I think that's kind of a joke, but either way, three massive businesses, not just one. If one part hits a rough patch, the others can keep printing cash. And here's the kicker. Microsoft uses its enormous cash flow to pay you a growing dividend, $3.64 a year right now, and they buy back its own stock, which if done at the right price, is a major win for investors. Guys, when a company buys its own shares and they buy them right, it shrinks the number of shares out there. So your slice of the econom of the company gets bigger and bigger and bigger without you doing a single thing.

[00:07:59]And on top of that, Microsoft pays a dividend. And then let's add on top of that the commercial backlog of $627 billion in signed contracts. Guys, that's not hope. That is money that's already committed. The bulls say that even if AI takes longer to pay off than expected, Microsoft's diversified cash machine protects you while you wait. So, that's the bull case. Now, we got to go flip mode here. Let's go look at the bare cases because if you're going to own Microsoft, you not only need to get excited about the story, you need to understand what could go wrong. Bare case number one, the AI spending might not pay off the way everyone hopes. This is the big one, guys, and it's the big one for me. Microsoft is spending that $190 billion on capital expenditures, and most of it's going to AI infrastructure. nearly $ 31 billion last quarter, scaling to over 40 or 50 billion dollars a quarter. And here's the thing about that spending. It has to earn a return at some point. You can't just look at a company saying, "Hey, sounds good. Go do it." It never returns money. Ah, we're good with that. If co-pilot adoption is slower than expected, if enterprise customers decide AI isn't worth the premium, or if the technology doesn't deliver the productivity gains people are hoping for, all that spending becomes a drag on profits, not a boost. Wall Street has already expressed serious anxiety about this. Free cash flow has absolutely taken a massive hit in the short term because remember, free cash flow is affected by capital expenditures. The bears say that we've seen this movie before. A hot new technology, massive spending, sky-high expectations, and then reality comes in below the hype.

[00:09:41]That's exactly why our fifth tenant of principal driven investing is that even a great business and story at the wrong price will end up being a bad investment. Barecase number two, the competition is getting far more dangerous. Amazon Web Services, AWS, is still the number one cloud provider.

[00:10:01]Google is spending just as aggressively on AI and has its own models that are getting very competitive. Open-source AI models are getting better and cheaper every single month, which could undercut the premium that Microsoft charges it for its AI tools. And the broader AI landscape is getting much more crowded, not less crowded. More players, more options, more pressure on pricing. The bears aren't saying that Microsoft gets destroyed. It is still the leader overall, but they're saying that the competition can quietly cap how much Microsoft can charge and it pushes its costs up. And when you're spending 1902 $200 billion a year, you need pricing power to make that math work. Bare case number three, the stock may still be priced for a perfect AI future. This is the cleanest warning for a value investor, so listen closely. Microsoft is an absolutely wonderful company. I'm not arguing otherwise. But even after dropping 30%, the price may still assume that everything goes right. Co-pilot takes off, Azure keeps growing 40%, margins expand, $200 billion in spending pays off beautifully, and competition never lands a punch. That's a lot of goes right. And we just saw what happens when reality comes in merely good instead of perfect. The stock can drop from 555 to 400 or 385 or lower. That's the whole danger in one sentence. A great business can still be a bad investment if you pay too much for it.

[00:11:30]Now, the PE is currently sitting around 23, which seems reasonable on the surface, and I don't think that's a bad PE, but that's based on current earnings. If those massive AI investment pressures margins going forward, or if growth slows down from here, that PE won't be as cheap as it is today. If the bears are right, cheaper doesn't always mean cheap. And that's what our stock analyzer is essential for. So, the question is, who's right, the Bulls or the Bears? Usually, it's a combination.

[00:11:58]Now, as a quick reminder before we dive in, never take our title and thumbnail literally. We are never here to give a stock tip. We're here to teach you a process so that one day you can apply that process to help yourself get better returns, sleep better at night because you know how to value a stock and make good assumptions on other companies out there or even Microsoft going forward.

[00:12:20]But the point is here, we're here to teach a process. So, we heard from both sides. Now, let's take a look at the numbers. And that's exactly what we do on our channel as part of this process.

[00:12:32]So, guys, we are going to pull up Microsoft in our favorite software in the world, the software that we use for everything. So, guys, I've pulled up Microsoft in our software. As of the recording right now, it is at $400 a share, but that's not the real price.

[00:12:46]The real price is 20 $2.95 trillion.

[00:12:50]That's the real price of the business.

[00:12:52]The stock price is merely that price divided by the number of shares. The next thing I look at enterprise value, $3.15 trillion. That difference is $200 billion, which is essentially the debt the company has. Sounds like a lot, right? Of course. But it's all relative.

[00:13:09]They generated $73 billion in free cash flow last year. That means in less than three years with beaten down free cash flow, they could still pay off all that debt in less than three years. And on top of that, look at their profit last year. $125 billion. So remember, we usually get concerned when net income is significantly higher than cash flow. But in this situation, we know why. It's because of their capital expenditures.

[00:13:34]Capital expenditures hit free cash flow day one, but they don't affect the net income for years to come because you have to take time to depreciate those capital expenditures. Next, I want to take a look at returns on capital. 20 almost 22% a year for the last five 14% last year probably driven by such a low uh such a big drop in free cash flow.

[00:13:55]Another thing I love 10-year profit margin 34%. 5year profit margin almost 37. One-year profit margin north of 39.

[00:14:03]So their profit margin keeps getting better and better. Guys, what a great world. Revenue gets higher and the profit on that revenue keeps growing.

[00:14:11]That is incredible.

[00:14:14]Next thing, yes, they have a lot of um acquisitions, 110 billion over the last 5 years total, but they're still growing 13, 14, 15% over the last 10, five, and three years. That means that these acquisitions were not driving all that growth. That's what I love about it.

[00:14:30]Now, I want to remind everybody this dividend is very small, 088%, but it eats up $25 billion a year because of how valuable the company is. All right, our community members, by the way, have it as a buy currently. But let's check out the eight pillars. Now, we love seeing something like this. We've got check marks on returns on capital, shares outstanding, cash flow growth, net income growth, revenue growth, and debt. The two X's are the valuation metrics, the 5-year PE and 5-year price to free cash flow. Now, I want to remind everybody, this does not mean the company's expensive just because it's an X. What it tells me is, hey, this is priced a little bit higher, but if the revenue growth and profit growth can justify it, these are fine. That's what you have to remember as an investor. A PE doesn't tell you anything in and of itself. If you have two companies that are selling for 30 times earnings, but one's going to grow 30% a year and the other one's going to grow 5% a year, which one's more expensive? The one that's growing 5% a year because the 30% growth that's going to just keep on growing at a higher rate and that 30p is going to be a lot cheaper. That's the point of all of this. I want make sure I teach you this. This is exactly why I talk about this. Now guys, I have thrown a lot at you. Key metrics, eight pillars. If it feels overwhelming, you're not alone. Every great investor in history at some point was overwhelmed. What I'm asking you to do is if you want to get better at this, just stick with it. You'll be good at it a lot faster than you think. And I'm here to make it simple for you. In the description below or the first pin comment, I have an absolutely free key metrics PDF that'll explain all of these to you. Click the link and you'll be able to download it in a matter of seconds. And now you'll be able to speak the same language as me. And when you look at your own companies, you'll be able to apply the same metrics to those.

[00:16:20]So guys, before we figure out what the stock is worth to us, let's see what analysts think about the growth of this business. So right now, analysts have earnings per share growing from $17 per share to $40 per share. That's two and a half times in the next seven in the next seven years. That's a lot, guys. That's over 10% a year earnings per share growth. As for revenue from 335 billion to 760 billion that is over well over double again over 10% growth for the next 10 years. So we have analysts optimistic about revenue and profit growth. So finally we have a story. We have some numbers. We got to put them together early on in our investigation to see if we should spend more time in this company. The reason I say that is I've heard so many other YouTubers say you got to understand the story before you look at numbers. I disagree. You get an idea of the story, you get an idea of the numbers, you put it in stock analyzer. If the if the price is currently close to what your analyzer says, spend more time on it. But if it's too far away, for example, if Microsoft's at 400 and the stock analyzer says it's worth a dollar, why spend any more time on it? Just move on to another company and just wait. So here are the assumptions that I made on Microsoft going forward for the next 10 years. I did 7, 10, and 13% revenue growth. For profit margin, I did 34, 37, and 40. Actually, I did that for both profit margin and free cash flow. The next questions, what PE and price of free cash flow do we sign this company 10 years from now? Well guys, the market average over a long period of times is 15 to 16, but you got to pay a premium for good companies, for great companies.

[00:18:06]I consider Microsoft a great company, so I went with 20, 23, and 26. And then finally, a 9% no margin of safety return.

[00:18:18]Now, that doesn't mean I I want no margin of safety, but for the intentions of this video and for teaching, I'm trying to figure out what the company is worth. That's why I pick 9%. Not what the company what I'm willing to pay for because what you and I are willing to pay for the company will be very different things. You might want a 20% return. You might want a 12% return. You might want 15. It all depends on the person, their personal situation, and their understanding of the company. I cannot determine that for you. But what I can tell you is if you only want 9 or 10%, don't buy individual stocks. Pick a lowcost ETF. only buy an individual stock if you think it's mispriced and you can get a much higher return than the overall market. Now, here's the thing about Microsoft. I would be hardressed to find anybody who's arguing whether it's a great business. I don't even think that's a conversation. The cloud is printing money. AI is embedded in everything they sell and the balance sheet is almost a fortress. You know it.

[00:19:13]I know it. Bill Aman just put real money behind it. Everybody knows. But here's what took me years to learn and something that I'm going to help you skip steps on because I learned through losing money. Knowing a company is great and knowing whether the stock is great at the at that price are two very different things and they're different skills. Most people never build the second skill. They just see a name they trust. They see someone smart buying it and they click buy. And sometimes that can work out, especially in a bull market. But sometimes you get end up overpaying for the best company on earth and you sit underwater for three, four, five years wondering what went wrong.

[00:19:51]That's exactly why we built everything money and the stock analyzer tool. Guys, I got tired of guessing. I wanted to sit down, make my assumptions about the future, put in my numbers, and have it tell me the price that makes sense for Microsoft to be a good deal for me. It's not a hope. It's not a vibe. It's a number. something concrete that I can attach myself to. And I'm going to tell you guys, I spent more time than I should have because I'm explaining it to you. But that 3 minutes I spent will have saved me tons of money, more than anything else I've ever done as an investor. Not because it's magic, because it stops me from making mistakes that cost me the most. Overpaying for something that everyone already agrees is great. Now guys, the great news is you can try the whole thing, the analyzer, the community, all of it for 7 days. The link is below because the analysis we're doing on Microsoft right now, you can run it yourself in much faster time than I did. And once you see your number, you're never going to look at stocks the same way again. So, I hit the analyze button and the stock price I have is a low price of 360, a high price of 8.22, middle price of 550, which based on today's price and my middle assumptions is about a 13% return. And guess what, guys? That includes dividends. Before we go anywhere, I want to show you guys what I want to buy on.

[00:21:09]Now, a little bit about bun backstory for anybody who doesn't know me yet. I own a lot of real estate. I own a lot of businesses. So, for me to buy stocks, I've decided in the last year or two that I want to get outsized returns because it's not worth it for me to have the hassle. So, I have picked 15% as my desired return for the company. So based on that and my assumptions above, my price is a low of 234, a high of 515, and a middle price of 350. So I have it on my watch list at 345. But the great news is, guys, it's not far from there.

[00:21:42]It's at 397. So what I'm going to do is I could go to my options right now and do what's called selling a cash secured put. This allows me to buy Microsoft at 350 and get paid to to wait. So, August 14th, I picked this date in the future.

[00:21:58]I went to my puts portion. I went to this $350 strike price. Somebody's going to pay me $4 per share to buy Microsoft at $ 350 on August 14th of 2026. That is a almost a 15% annualized return just on my cash. I was getting 3.74 from treasuries. Now, I'm getting 14.8 annualized. Now, you might be like, "Wait a second, what does this mean?" In very simple English, what this means is if the stock price ends up below 350, somebody can force me to buy it for 350.

[00:22:31]So if it goes to 330, I'm still paying 350, but I also got to keep $4, so I'm basically paying 346 for it. Now, you might be like, "Well, Paul, why would you want to pay more than the 330?" It's not about that. It's about me saying, "I want it for 350 and I'm willing to sell somebody. Somebody's willing to pay me to wait for it to go lower." This is what I do when I'm saying, "Hey, the second it hits 350, I'm buying it no matter what." So, if I waited for it to 350 and I bought it and it went to 330, I just lost $20, right? But instead, I lost 16 now because I got to keep the $4. That's the strategy I use to make outsized returns on my cash and to buy companies I love at the prices I want.

[00:23:10]Now, guys, there is one more stock you need to see. It's the one that I think could be a bigger opportunity in the market right now. So, click this video right here to watch it. Thank you for your time.