NOTE: “Intrinsic value is a term used in investing to refer to the underlying or true value of a company’s stock. It’s an estimate of what a stock should be worth based on factors such as the company’s financial health, earnings, assets, liabilities, growth potential, and other relevant factors.” — ChatGPT
Microsoft: MSFT // Purple 8 // Strike Price = {subscribe}
- 10 year CAGR = 25.1% (May 8, 2013 to 2023 | $32.99 – $308.65)
- 5 year CAGR = 26.4% (May 5, 2018 to 2023)
- Future Growth Rate Estimate: {subscribe}
- When we look at the 10 year average growth rate of revenue and various financial numbers along with analyst expectations, the actual stock price has been growing about double what we can give the Future Growth Rate.
- 5 year Price Target = {subscribe} at a Price to Revenue multiple of {subscribe}
- sector median is 2.57 and MSFT is 11.16 with a 5 year avg. of 10
- This price to revenue multiple is very high considering the growth rate, but they do have solid numbers to warrant the elevation. Perhaps AI will help push revenue above expectations to help justify the elevated multiple.
- Price to Free Cash Flow / Share = 40.1 🤔
- Operating Margin = 41% 😀
- Return on Invested Capital = 25.5% 😀
- Long Term Debt to Total Assets = 0.01% 😀
- Cash & Equivalents to Total Operating Expense = 185.6% 😀
// TL;DR
Even though Microsoft founder and former CEO is an a-hole and a hypocrite,* the company is pretty dang blue chip and the current CEO is operating in beast-mode being lashed by an AI tailwind so we are using a margin of safety of 0% instead of the standard 50% to come up with the Strike Price. However, the stock is currently about 35% above our intrinsic value. This could be Exhibit A for those that complain the market is overvalued. But it should be noted that behemoths like Microsoft tend to have the least severe sell-offs in a market melt-down.
According to ChatGPT:
“Buying a stock that is 35% above its intrinsic value could be risky, as there may be limited upside potential and a higher risk of a price correction. It’s important to conduct thorough research and analysis before making any investment decisions and to consider factors such as the company’s financial health, growth potential, and industry trends. It’s also recommended to consult with a financial advisor or investment professional for personalized advice based on your individual financial situation and goals.”
Yes they appear to be an AI play and yes they are blue chip and if you happen to own stock, holding is the prudent path, but starting a fresh position now smells of FOMO. Abide the Strike Price.
* Bill Gates is an a-hole because of his predatory and boorish antics as a young man running Microsoft which we forgave him for because of all the charitable work he has done since. But he also talks a big game about his green cred and yet he had a multi-billion dollar short position against Tesla, the company that has done the most to propel civilization towards climate change solutions. Investor-wise he may have been correct to short Tesla at that moment but it looks really two-faced and is a very negative energy to put into the world. He easily has the resources to find much better ways to add to his immense wealth. There are still a few acres of farmland left that he doesn’t own. A-hole status reinstated.
// WHY BUY
Microsoft is studied to the micro degree and have been part of the zeitgeist for decades so we aren’t going to spend days researching it and coming up with metrics XBox’s sold and Windows OS churn rates and Bing costs per generative AI search and whatever else. You’re welcome to do that yourself.
However, crunching their financial numbers indicates they are at a very premium valuation for their expected Future Growth Rate. Our assessment indicates that they are about 75% above their intrinsic value, or the sum of their parts.
Instead of why buy, we give it a don’t buy. But if we were packin’, neither would we be sellin’.
// ChatGPT: WHY BUY
There could be several reasons why someone may consider buying Microsoft, such as:
- Investment opportunity: Microsoft is a large and well-established company with a strong track record of growth and profitability. Investing in Microsoft could potentially provide a good return on investment.
- Diversification: Adding Microsoft to an investment portfolio can help diversify the portfolio and reduce risk.
- Long-term potential: Microsoft is a leader in the technology industry and has a strong presence in areas such as cloud computing, artificial intelligence, and gaming. The company’s long-term potential for growth and innovation may make it an attractive investment opportunity.
// CONCLUSION
Buy on sale if you ever can and HODL until it is no longer so dang blue chip.
// CATALYSTS
AI enabled search and application functionality improvements.
// RISKS
Depression that crushes their price to revenue multiple. Their AI goes insane in the membrane. Bill Gates comes back as CEO. For the company there are not a lot of existential risks, but for you there is a risk of buying at this premium valuation because the numbers are not suggesting they can keep up the market outperforming pace of CAGR they have had the past 10 years.
// NEWS & COMMENTS
May 7, 2023
SA // hold: Microsoft Corporation Goes Beast Mode (Rating Downgrade)
“While there are certainly reasons to be cautious about some aspects of Microsoft Corporation’s business in the coming months, there’s nevertheless an indication that the company has everything going for it to continue to generate aggressive returns and create additional shareholder value at the same time. As such, I would argue that if Microsoft Corporation management continues to scale the company’s core and cloud businesses while its AI products continue to attract new users, then Microsoft would be able to outpace the competition. This would make its stock an attractive investment in the long run. However, the lack of the margin of safety along with the increase of macro risks could nevertheless kill the momentum and force a depreciation of Microsoft Corporation shares in the short to near term.”
// GGI 💬
Yup.
May 7, 2023
SA // hold: The Rally Still Has Legs And We Are All Too Late
“It appears that the “rally still has legs,” with MSFT likely to retest its next resistance level at March 2022 of $315 over the next few days. Nonetheless, with the peak recessionary fears painting an uncertain macroeconomic outlook, we prefer to prudently rate the stock as a Hold here, due to the minimal upside potential to our price target of $321.64. This is based on its 1Y P/E mean of 25.67 and the market analyst’s projected FY2025 EPS of $12.53.
Interested investors may want to wait for moderate retracements ahead, for an improved margin of safety. Do not chase the rally here.”
// GGI 💬
The current PE ratio is 33.4 while that of the S&P 500 is 23.9 with a mean of 16.
