Microsoft Is The Ultimate Wonderful Company At A Fair Price (NASDAQ:MSFT)

Table of Contents

tiero/iStock via Getty Images

It’s been an extraordinary year for stocks.

On May 18th, the S&P fell 4%, and the Nasdaq almost 5%, the worst day for the market since June 11th, 2020.

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Ycharts

For many popular growth stocks, it’s not just been a bear market but a complete collapse.

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Charlie Bilello

Tech is getting slaughtered, with even some of the world’s best growth names down 50% to 75%…in just 4.5 months.

Warren Buffett is famous for saying, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”.

So today, I wanted to bring to your attention an opportunity we haven’t seen in over two years.

Microsoft (NASDAQ:MSFT) is arguably the greatest company on earth.

And for the first time since the pandemic, it’s trading below fair value.

So, let me show you the four reasons why Microsoft isn’t just a potentially good buy here, but potentially the ultimate Buffett-style wonderful company at a fair price.

Or to put it another way, let me show you why I just bought MSFT and you might want to consider doing the same.

Reason One: Microsoft Is The Complete Package

Bottom line up front, MSFT is an exceptional company.

Reasons To Potentially Buy MSFT Today

  • 100% quality low-risk 13/13 Ultra SWAN hyper-growth software company
  • 100% dividend safety score
  • 0.5% average recession cut risk
  • 1.0% severe recession cut risk
  • 0.9% very safe yield (same as Nasdaq’s)
  • 18-year dividend growth streak (every year since they began paying one)
  • 6% conservatively undervalued (potential good buy)
  • Fair Value: $270.21 (25.4X earnings)
  • 23.7X forward earnings vs 22X to 25.5X historical (Nadella Era, current business model)
  • 17.5X cash-adjusted earnings = growth at a reasonable price
  • AAA stable outlook credit rating =0.07% 30-year bankruptcy risk
  • #1 credit rating in America
  • 85th industry percentile risk management consensus = very good
  • 13% to 20% CAGR margin-of-error growth consensus range
  • 12.3% to 22.0% CAGR individual analyst growth range
  • 15.8% CAGR median growth consensus
  • 5-year consensus total return potential: 10% to 16% CAGR
  • base-case 5-year consensus return potential: 14% CAGR (2X S&P consensus)
  • consensus 12-month total return forecast: 40% (overly bullish)
  • Fundamentally Justified 12-Month Returns: 4% CAGR

MSFT is in a 25% bear market not justified by its strong fundamentals.

  • Its peak 40X PE made it approximately 58% overvalued

MSFT Investment Thesis Is Intact

Metric 2020 Growth 2021 Growth Consensus 2022 Growth Consensus 2023 Growth Consensus

2024 Growth Consensus

Sales 15% 19% 20% 15% 13%
Dividend 11% 10% 11% 10% 11%
EPS 21% 38% 17% 16% 17%
Operating Cash Flow 17% 28% 19% 16% 14%
Free Cash Flow 19% 25% 19% 15% 17%
EBITDA 21% 25% 24% 16% 14%
EBIT (operating income) 25% 33% 22% 15% 16%

(Source: FAST Graphs, FactSet)

MSM’s growth thesis remains firmly intact.

MSFT Rolling Returns Since April 1986

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(Source: Portfolio Visualizer Premium)

MSFT has been a very consistent market-beater over the last 36 years, with 17+% average rolling returns.

  • from bear market bottoms returns as strong as 48% annually over the next 15 years
  • 342X return over a 15-year

MSFT 2024 Consensus Total Return Potential

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(Source: FAST Graphs, FactSet)

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(Source: FAST Graphs, FactSet)

If MSFT grows as analysts expect by 2024 it could deliver 28% total returns, or 13% annually.

  • slightly better than market returns
  • with far higher quality and safety

MSFT 2027 Consensus Total Return Potential

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(Source: FAST Graphs, FactSet)

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(Source: FAST Graphs, FactSet)

By 2027, if MSFT grows as expected (15.4% CAGR) and returns to historical fair value, it could deliver 95% total returns or 14% annually.

MSFT Long-Term Consensus Total Return Potential

Investment Strategy Yield LT Consensus Growth LT Consensus Total Return Potential Long-Term Risk-Adjusted Expected Return Long-Term Inflation And Risk-Adjusted Expected Returns Years To Double Your Inflation & Risk-Adjusted Wealth

10 Year Inflation And Risk-Adjusted Expected Return

Adam’s Planned Correction Buys 4.1% 19.2% 23.3% 16.3% 13.8% 5.2 3.63
Microsoft 0.9% 15.80% 16.7% 11.7% 9.1% 7.9 2.40
Nasdaq (Growth) 1.0% 14.3% 15.3% 10.7% 8.1% 8.8 2.19
Dividend Aristocrats 2.2% 8.9% 11.1% 7.8% 5.2% 13.8 1.66
S&P 500 1.7% 8.5% 10.2% 7.1% 4.6% 15.7 1.57

(Sources: Morningstar, FactSet, Ycharts)

  • analysts expect MSFT to beat almost all growth investment strategies on Wall Street in the long-term
  • including the Nasdaq, aristocrats, and S&P 500

MSFT Total Returns Since April 1986

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(Source: Portfolio Visualizer Premium)

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(Source: Portfolio Visualizer Premium)

MSFT has delivered 1,733X inflation-adjusted returns since April 1986, about 126X better than the S&P 500.

What do analysts expect in the future?

Inflation-Adjusted Consensus Return Potential: $1,000 Initial Investment

Time Frame (Years) 7.7% CAGR Inflation-Adjusted S&P Consensus 8.7% Inflation-Adjusted Aristocrat Consensus 14.3% CAGR Inflation-Adjusted MSFT Consensus Difference Between Inflation Adjusted 12 Hyper-growth Ultra SWANs Consensus And S&P Consensus
5 $1,445.67 $1,514.08 $1,946.62 $500.95
10 $2,089.97 $2,292.44 $3,789.33 $1,699.36
15 $3,021.42 $3,470.93 $7,376.38 $4,354.96
20 $4,367.98 $5,255.26 $14,359.00 $9,991.02
25 $6,314.67 $7,956.89 $27,951.51 $21,636.83
30 $9,128.95 $12,047.36 $54,410.94 $45,281.99

(Source: DK Research Terminal, FactSet)

Even if MSFT only grows as expected over the next 10 years, that’s a very impressive 4X inflation-adjusted consensus potential.

Time Frame (Years) Ratio Aristocrats/S&P 500 Ratio Inflation-Adjusted MSFT Consensus And S&P Consensus
5 1.05 1.35
10 1.10 1.81
15 1.15 2.44
20 1.20 3.29
25 1.26 4.43
30 1.32 5.96

(Source: DK Research Terminal, FactSet)

MSFT can’t beat the market by 126X in the future, but it could double the market over the next decade and outperform by impressive amounts in the coming decades.

  • all with the highest safety and quality you can find on Wall Street

MSFT Investment Decision Score

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DK

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(Source: DK Automated Investment Decision Tool)

For anyone comfortable with its risk profile, MSFT is one of the most reasonable and prudent hyper-growth Ultra SWANs you can buy today.

  • 6% discount vs 1% market discount = 5% better valuation
  • 60% higher long-term return potential than S&P 500 overtime
  • about 2X better risk-adjusted expected return over the next five years

Reason Two: Quite Possibly The Highest Quality Company On Earth

There are many ways to measure safety and quality and I factor in pretty much all of them.

The Dividend Kings’ overall quality scores are based on a 244-point model that includes:

  • Dividend safety

  • Balance sheet strength

  • Credit ratings

  • Credit default swap medium-term bankruptcy risk data

  • Short and long-term bankruptcy risk

  • Accounting and corporate fraud risk

  • Profitability and business model

  • Growth consensus estimates

  • Management growth guidance

  • Historical earnings growth rates

  • Historical cash flow growth rates

  • Historical dividend growth rates

  • Historical sales growth rates

  • Cost of capital

  • GF Scores

  • Long-term risk-management scores from MSCI, Morningstar, FactSet, S&P, Reuters’/Refinitiv, and Just Capital

  • Management quality

  • Dividend friendly corporate culture/income dependability

  • Long-term total returns (a Ben Graham sign of quality)

  • Analyst consensus long-term return potential

In fact, it includes over 1,000 fundamental metrics including the 12 rating agencies we use to assess fundamental risk.

  • credit and risk management ratings make up 41% of the DK safety and quality model

  • dividend/balance sheet/risk ratings make up 82% of the DK safety and quality model

How do we know that our safety and quality model works well?

During the two worst recessions in 75 years, our safety model 87% of blue-chip dividend cuts, the ultimate baptism by fire for any dividend safety model.

How does MSFT score on our comprehensive safety and quality models?

MSFT Dividend Safety

Rating Dividend Kings Safety Score (162 Point Safety Model) Approximate Dividend Cut Risk (Average Recession)

Approximate Dividend Cut Risk In Pandemic Level Recession

1 – unsafe 0% to 20% over 4% 16+%
2- below average 21% to 40% over 2% 8% to 16%
3 – average 41% to 60% 2% 4% to 8%
4 – safe 61% to 80% 1% 2% to 4%
5- very safe 81% to 100% 0.5% 1% to 2%
MSFT 100% 0.5% 1.0%
Risk Rating Low-Risk (85th industry percentile risk-management consensus) AAA Stable outlook credit rating 0.07% 30-year bankruptcy risk 20% OR LESS Max Risk Cap Recommendation

Long-Term Dependability

Company DK Long-Term Dependability Score Interpretation Points
Non-Dependable Companies 21% or below Poor Dependability 1
Low Dependability Companies 22% to 60% Below-Average Dependability 2
S&P 500/Industry Average 61% (61% to 70% range) Average Dependability 3
Above-Average 71% to 80% Very Dependable 4
Very Good 81% or higher Exceptional Dependability 5
MSFT 100% Exceptional Dependability 5

Overall Quality

MSFT Final Score Rating
Safety 100% 5/5 very safe
Business Model 100% 3/3 wide moat, stable
Dependability 100% 5/5 exceptional
Total 100% 13/13 Ultra SWAN
Risk Rating 3/3 Low Risk
20% OR LESS Max Risk Cap Rec

5% Margin of Safety For A Potentially Good Buy

Microsoft is the #1 highest quality company on the DK Master List.

And that’s saying something because look at what’s on that list.

The DK 500 Master List includes the world’s highest quality companies including:

  • All dividend champions

  • All dividend aristocrats

  • All dividend kings

  • All global aristocrats (such as BTI, ENB, and NVS)

  • All 13/13 Ultra Swans (as close to perfect quality as exists on Wall Street)

  • 49 of the world’s best growth stocks

Basically, MSFT is as close to God’s own company as can exist on Wall Street.

Why I Trust Microsoft And So Can You

Microsoft was founded in 1975 and is today the #1 largest software company on earth and the 2nd biggest in cloud computing.

Since taking over as CEO in 2014, Satya Nadella has reinvented Microsoft into a cloud leader. In our view, Microsoft has become one of two public cloud providers that can deliver a wide variety of PaaS/IaaS solutions at scale. Additionally, Microsoft embraced the open-source movement and has largely transitioned from a traditional perpetual license model to a subscription model. Finally, Microsoft exited the low-growth, low-margin mobile handset business and is driving Gaming to be more cloud-based. These factors have combined to drive a more focused company that offers impressive revenue growth with high and expanding margins.” -Morningstar

Satya Nadella pivoted the company in 2014 to focus on recurring revenue and cloud computing.

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Statista

In 2021, cloud computing grew at 37% while Microsoft’s cloud business grew at 50%.

Cloud Computing Market Size Worth $1,554.94 Billion by 2030: Grand View Research, Inc.

Grandview research expects the global cloud market to grow about 16% annually through 2030, meaning that AMZN is expected to maintain or even increase its market share.

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IOT Analytics

IOT analytics thinks cloud computing will be worth $2 trillion per year within 10 to 20 years, and potentially as much as $10 trillion.

  • IOT estimates that conservatively cloud computing will grow at least 4X in the next 10 to 20 years
  • likely 13X growth
  • potentially 64X growth
  • cloud computing alone is a secular megatrend that Amazon could surf for decades to come

Despite being the 2nd largest cloud computing company on earth, Azure is expected to keep growing at over 30% through at least 2024.

It was a record third quarter, driven by the continued strength of the Microsoft Cloud, which surpassed $23 billion in revenue, up 32% year-over-year. Going forward, digital technology will be the key input that powers the world’s economic output. Across the tech stack, we are expanding our opportunity and taking share as we help customers differentiate, build resilience, and do more with less.” – Satya Nadella, Q1 conference call

In Q1, across the entire cloud business, sales grew at 32% to an annual run rate of $94 billion.

  • cloud computing is a great recession-resistant business
  • monthly recurring revenue
  • productivity-boosting and cost-cutting for companies mean cloud growth is likely resistant to recessions

Leaders in every industry, from BlackRock to Bridgestone, to Lufthansa, are all moving mission-critical workloads to Azure.” – CEO

The world’s biggest companies (and small ones) trust Azure for their cloud computing needs.

The number of $100 million-plus Azure deals more than doubled year-over-year. And we’re seeing consumption growth across every industry, customer segment, and geography.” – CEO

MSFT’s large contracts more than doubled over the past year for cloud computing.

Talent Solutions revenue was up 43%, marking the sixth consecutive quarter of accelerating growth.” – CEO

MSFT’s $26 billion acquisition of LinkedIn in 2016 is turning out very well with 35% over sales growth.

  • six consecutive quarters of accelerating growth, thanks to the tightest job market in over 50 years
  • 830 million global users

Even in a red hot job market and inflation soaring, MSFT’s margins are expanding and operating profits rose 23% in constant currency and EPS by 18%.

96% of MSFT’s commercial cloud business is recurring revenue and gross margins are holding steady at 70%, while new bookings grow at 35%.

Despite being on over 1 billion computers in the world, Office is growing at 12% to 25% per year and LinkedIn at 35%.

The overall cloud business continues to grow at over 30% with 81% operating margins.

Azure grew at 49% in calendar Q1, the same growth rate as last year.

Across the board MSFT is growing:

  • advertising sales + 25%
  • Windows OEM: +11%
  • surface +18%

Bottom Line: MSFT Is Firing On All Cylinders

MSFT Credit Ratings

Rating Agency Credit Rating 30-Year Default/Bankruptcy Risk Chance of Losing 100% Of Your Investment 1 In
S&P AAA Stable Outlook 0.07% 1428.6
Fitch AAA Stable Outlook 0.07% 1428.6
Moody’s Aaa Stable Outlook 0.07% 1428.6
Consensus AAA Stable Outlook 0.07% 1428.6

(Source: S&P, Moody’s)

Rating agencies estimate a 0.07% fundamental risk for MSFT, meaning a 1 in 1,429 chance of investors losing all their money in the next 30 years.

  • better credit rating than the US treasury
  • as close to a fundamentally risk-free stock as exists
  • the single best credit rating in America

MSFT Leverage Consensus Forecast

Year Debt/EBITDA Net Debt/EBITDA (3.0 Or Less Safe According To Credit Rating Agencies)

Interest Coverage (8+ Safe)

2020 0.96 -1.11 25.28
2021 0.71 -0.88

80.01

2022 0.50 -0.46 80.01
2023 0.43 -0.56 91.56
2024 0.35 -1.15 109.26
Annualized Change -22.22% 0.91% 44.19%

(Source: FactSet Research Terminal)

MSFT’s fortress balance sheet keeps getting stronger over time.

MSFT Balance Sheet Consensus Forecast

Year Total Debt (Millions) Cash Net Debt (Millions) Interest Cost (Millions) EBITDA (Millions) Operating Income (Millions)
2020 $63,327 $13,576 -$73,200 $2,095 $65,755 $52,959
2021 $58,146 $14,224 -$72,188 $2,012 $81,602 $69,916
2022 $49,850 $27,929 -$45,488 $1,053 $99,728 $84,249
2023 $49,425 $70,988 -$64,776 $1,055 $115,295 $96,599
2024 $46,607 $99,355 -$152,594 $1,027 $132,196 $112,210
2025 NA NA NA NA NA $126,745
Annualized Growth -7.38% 64.48% 20.16% -16.32% 19.08% 19.07%

(Source: FactSet Research Terminal)

MSFT’s debt is falling, its cash is soaring, and its cash flows are growing at almost 20%.

MSFT Bond Profile

  • $105 billion in liquidity
  • well-staggered bond maturities (no issues refinancing maturing debt)
  • 100% unsecured bonds (maximum financial flexibility)
  • bond investors are so confident in MSFT’s business that they are willing to lend to it for 40 years at 4.2%
  • average borrowing costs 3.21%
  • 0.66% inflation-adjusted borrowing costs vs 35.4% returns on invested capital

MSFT Credit Default Swaps: Real-Time Fundamental Risk Assessment From The Bond Market

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(Source: FactSet Research Terminal)

Credit Default Swaps are insurance policies bond investors take out against defaults, and represent a real-time fundamental update of a company’s risk profile.

  • when scary headlines break, watch the CDS to see how concerned the “smart money” is about fundamental risk

MSFT’s fundamental risk has modestly increased in recent months but remains very low.

  • 0.33% over the next 5 years
  • 0.5581% over the next decade

The bond market is basically agreeing with analysts and rating agencies that MSFT’s thesis remains intact.

MSFT GF Score: The Newest Addition To The DK Safety And Quality Model

The GF Score is a ranking system that has been found to be closely correlated to the long-term performances of stocks by backtesting from 2006 to 2021.” – Gurufocus

GF Score takes five key aspects into consideration. They are:

  • Financial Strength
  • Profitability
  • Growth
  • Valuation
  • Momentum

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(Source: Gurufocus Premium)

MSFT’s near-perfect 97/100 GF score confirms it’s an industry leader in everything that matters.

  • industry-leading profitability
  • industry-leading financial strength
  • industry-leading growth
  • industry-leading value

MSFT Profitability: Wall Street’s Favorite Quality Proxy

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(Source: Gurufocus Premium)

Historical profitability is in the top 10% of peers.

MSFT Trailing 12-Month Profitability Vs. Peers

Metric Industry Percentile Major Software Companies More Profitable Than MSFT (Out Of 2,705)
Gross Margins 73.44 718
Operating Margin 98.13 51
Net Margin 96.87 85
Return On Equity 96.69 90
Return On Assets 96.08 106
Returns On Invested Capital 91.60 227
Return On Capital 79.73 548
Return On Capital Employed 93.97 163
Average 93.30 181

(Source: Gurufocus Premium)

In the last year, MSFT’s profitability was in the top 7% of its peers.

MSFT’s industry-leading profitability has been relatively stable for 30 years, confirming a wipe and stable moat.

MSFT Profit Margin Consensus Forecast

Year FCF Margin EBITDA Margin EBIT (Operating) Margin Net Margin Return On Capital Expansion

Return On Capital Forecast

2020 31.6% 46.0% 37.0% 31.0% 1.03
2021 33.4% 48.5% 41.6% 36.1% TTM ROC 101.70%
2022 33.2% 50.1% 42.3% 35.4% Latest ROC 113.14%
2023 33.6% 50.7% 42.4% 35.3% 2025 ROC 104.89%
2024 34.5% 51.2% 43.5% 35.9% 2025 ROC 116.69%
2025 NA NA 42.9% 35.6% Average 110.79%
2026 NA NA NA NA Industry Median 13.31%
2027 NA NA NA NA MSFT/Industry Median 8.32
Annualized Growth 2.23% 2.73% 2.99% 2.83% Vs. S&P 7.59
Annualized Growth (Ignoring Pandemic) 1.14% 1.80% 0.78% -0.33%

(Source: FactSet Research Terminal)

MSFT’s free cash flow margins are expected to improve to 35% by 2024.

  • top 5% of all companies on earth

MSFT’s industry-leading profitability is expected to keep improving over time due to its incredible economies of scale.

  • return on capital = annual pre-tax profit/all the money it takes to run the business
  • Joel Greenblatt’s gold standard proxy for quality and moatiness

Returns on capital are expected to remain stable at 8X its industry peers and 8X that of the S&P 500.

MSFT’s ROC has been stable for 30 years, confirming a wide and stable moat.

And improving profitability is despite some very impressive growth spending.

This brings us to the 3rd reason to potentially buy MSFT today.

Reason Three: Strong Growth Prospects For The Foreseeable Future

MSFT is at the forefront of cloud computing and software as a service, which is the future of not just tech, but pretty much everything in business.

MSFT Growth Spending Consensus Forecast

Year SG&A (Selling, General, Administrative) R&D Capex Total Growth Spending Sales Growth Spending/Sales
2020 $24,709 $19,269 $15,441 $59,419 $143,015 41.55%
2021 $25,224 $20,716 $20,622 $66,562 $168,088 39.60%
2022 $28,000 $24,216 $23,996 $76,212 $199,145 38.27%
2023 $32,277 $26,994 $27,659 $86,930 $227,577 38.20%
2024 $36,083 $30,129 $31,117 $97,329 $258,144 37.70%
2025 $36,931 NA NA NA $295,438 12.50%
Annualized Growth 9.93% 11.82% 19.15% 13.13% 15.62% -2.40%
Total Spending 2022 To 2024 $96,360 $81,339 $82,772 $260,471 $684,866 38.03%

(Source: FactSet Research Terminal)

MSFT is expected to spend about $87 billion per year on growth through 2025.

  • and still, be generating $81 billion in annual FCF by 2025

Growth spending is growing at 13% per year, totaling 38% of its $685 billion estimated revenue over the next three years.

MSFT Medium-Term Growth Consensus Forecast

Year Sales Free Cash Flow EBITDA EBIT (Operating Income) Net Income
2020 $143,015 $45,234 $65,755 $52,959 $44,281
2021 $168,088 $56,118 $81,602 $69,916 $60,651
2022 $199,145 $66,121 $99,728 $84,249 $70,528
2023 $227,577 $76,468 $115,295 $96,599 $80,238
2024 $258,144 $89,169 $132,196 $112,210 $92,751
2025 $295,438 NA NA $126,745 $105,187
Annualized Growth 15.62% 18.49% 19.08% 19.07% 18.89%
Annualized Growth (Ignoring Pandemic) 15.14% 16.69% 17.45% 16.03% 14.76%

(Source: FactSet Research Terminal)

MSFT is growing like a weed despite $200 billion in annual sales.

MSFT Dividend Potential Consensus Forecast

Year Dividend Consensus FCF/Share Consensus FCF Payout Ratio Retained (Post-Dividend) Free Cash Flow Buyback Potential Debt Repayment Potential
2022 $2.47 $8.81 28.0% $47,442 2.43% 81.6%
2023 $2.71 $10.14 26.7% $55,599 2.85% 111.5%
2024 $2.99 $11.85 25.2% $66,299 3.39% 133.0%
Total 2022 Through 2024 $8.17 $30.80 26.5% $169,340.29 8.67% 339.70%
Annualized Rate 10.02% 15.98% -5.13% 18.21% 18.21% 27.67%

(Source: FactSet Research Terminal)

Rating agencies consider 60% a safe payout ratio and MSFT’s is expected to average 27% over the next three years.

Allowing MSFT to retain about $169 billion in post-dividend free cash flow.

  • enough to buyback 9% of its stock at current valuations
  • or pay off its debt more than 3X over

MSFT Buyback Consensus Forecast

Year Consensus Buybacks ($ Millions) % Of Shares (At Current Valuations) Market Cap
2022 $29,314.0 1.5% $1,952,925
2023 $31,647.0 1.6% $1,952,925
2024 $34,879.0 1.8% $1,952,925
Total 2022-2023 $95,840.00 4.9% $1,952,925
Annualized Rate 2.10% Average Annual Buybacks $31,946.67

(Source: FactSet Research Terminal)

MSFT is expected to average $32 billion in annual buybacks over the next three years, nearly $100 billion in total.

  • an average annual net rate of 2.1%

MSFT began consistently buying back stock in 2005, and over the last 17 years has averaged 2.3% annual net buybacks.

Time Frame (Years) Net Buyback Rate Shares Remaining Net Shares Repurchased Each Share You Own Is Worth X Times More (Not Including Future Growth And Dividends)
5 2.1% 89.93% 10.07% 1.11
10 2.1% 80.88% 19.12% 1.24
15 2.1% 72.73% 27.27% 1.37
20 2.1% 65.41% 34.59% 1.53
25 2.1% 58.83% 41.17% 1.70
30 2.1% 52.90% 47.10% 1.89

(Source: FactSet Research Terminal)

If MSFT buys back stock at the expected rate, then over the next 30 years they could repurchase about half their shares.

  • boosting the intrinsic value of your shares by almost 2X
  • not counting dividend and earnings growth over that time

MSFT Long-Term Growth Outlook

  • 14.8% to 16.2% CAGR consensus range (five sources)
  • 12.3% to 22.0% individual analyst range
  • 15.8% median growth consensus from all 47 analysts

How accurate are analysts at forecasting MSFT’s growth over time?

Smoothing for outliers historical margins of error are 20% to the upside and 10% to the downside.

  • 13% to 20% CAGR historical margin-of-error adjusted growth consensus range
  • 70% statistical probability that MSFT grows at 13% to 20% over time

MSFT’s historical growth rates over the last 20 years have ranged from 8% to 39% CAGR.

  • steady acceleration in growth under Satya Nadella and the cloud-focused recurring revenue model

Analysts expect growth in the future to be similar to the last seven or eight years.

MSFT’s growth catalysts warrant this growth forecast given the potential for cloud computing to become a $10 trillion annual market.

  • with 81% operating margins

Reason Four: A Wonderful Company At A Wonderful Price

Even during the slow growth Ballmer years, when MSFT grew at 8%, billions of investors, outside of bear markets and bubbles, still paid 18.5X earnings for it.

  • in the Nadella era, with a more stable and faster-growing cash flow, it’s traded at 22 to 25.5X earnings

GOOG has less stable cash flows and a similar 16% growth consensus and historically trades at about 25X to 26X.

Based on the market-determined historical fair value during the Nadella era, I estimate MSFT is worth about 25X to 26X.

Metric Historical Fair Value Multiples (9-Years, Nadella Era, New Business Model) 2020 2021 2022 2023 2024

12-Month Forward Fair Value

Earnings 25.35 $174.41 $219.28 $254.51 $295.33 $340.70
Average $174.41 $219.28 $254.51 $295.33 $340.70 $270.21
Current Price $253.78

Discount To Fair Value

-45.51% -15.73% 0.29% 14.07% 25.51% 6.08%

Upside To Fair Value (NOT Including Dividends)

-31.28% -13.60% 0.29% 16.37% 34.25% 6.47% (7.5% including dividend)
2022 EPS 2023 EPS 2021 Weighted EPS 2022 Weighted EPS 12-Month Forward EPS 12-Month Average Fair Value Forward PE

Current Forward PE

$10.04 $11.65 $6.18 $4.48 $10.66 25.4 23.8

  • 17.5X cash-adjusted earnings
  • growth at a reasonable price

Analyst Median 12-Month Price Target

Morningstar Fair Value Estimate

$360.43 (33.8 PE) $352.00 (33.0 PE)

Discount To Price Target (Not A Fair Value Estimate)

Discount To Fair Value

29.59% 27.90%

Upside To Price Target (Not Including Dividend)

Upside To Fair Value (Not Including Dividend)

42.02% 38.70%

12-Month Median Total Return Price (Including Dividend)

Fair Value + 12-Month Dividend

$362.91 $354.38

Discount To Total Price Target (Not A Fair Value Estimate)

Discount To Fair Value + 12-Month Dividend

30.07% 28.39%

Upside To Price Target ( Including Dividend)

Upside To Fair Value + Dividend

43.00% 39.64%

I’m still a bit skeptical that MSFT is worth 33X earnings, and that it can deliver 43% total returns in the next year.

But if analysts and Morningstar are right, then MSFT isn’t just a good buy but a potentially very strong buy.

What I care about is whether or not the margin of safety is sufficient to compensate investors for MSFT’s risk profile.

Rating Margin Of Safety For Low-Risk 100% Quality 13/13 Ultra SWAN quality companies 2022 Price 2023 Price

12-Month Forward Fair Value

Potentially Reasonable Buy 0% $254.51 $295.33 $270.21
Potentially Good Buy 0% $254.51 $295.33 $270.21
Potentially Strong Buy 10% $229.06 $265.79 $243.19
Potentially Very Strong Buy 20% $203.61 $236.26 $216.17
Potentially Ultra-Value Buy 30% $178.16 $206.73 $189.15
Currently $253.78 0.29% 14.07% 6.08%
Upside To Fair Value (Not Including Dividends) 0.29% 16.37% 6.47%

For anyone comfortable with its risk profile, MSFT is a potentially good buy.

Risk Profile: Why Microsoft Isn’t Right For Everyone

There are no risk-free companies and no company is right for everyone. You have to be comfortable with the fundamental risk profile.

What Could Cause MSFT’s Investment Thesis To Break

  • safety falls to 40% or less
  • balance sheet collapses (highly unlikely, highest credit rating in America, 0.07% long-term bankruptcy risk)
  • growth outlook falls to less than 9.1% for eight years
  • MSFT’s role in my portfolio is to deliver long-term 10+% returns with minimal fundamental risk

How long it takes for a company’s investment thesis to break depends on the quality of the company.

Quality

Years For The Thesis To Break Entirely

Below-Average 1
Average 2
Above-Average 3
Blue-Chip 4
SWAN 5
Super SWAN 6
Ultra SWAN 7
100% Quality Companies (MSFT, LOW, and MA) 8

These are my personal rules of thumb for when to sell a stock if the investment thesis has broken.

MSFT is highly unlikely to suffer such catastrophic declines in fundamentals.

MSFT’s Risk Profile Includes

  • legacy software margin compression risk
  • M&A risk (Activision is the biggest acquisition in its history by far)
  • talent retention risk (tightest job market in over 50 years) – this is a high paying industry
  • currency risk (-2% sales hit due to the strong dollar according to management)
  • regulatory risk (few things threaten MSFT’s moat as much as national governments)

How do we quantify, monitor, and track such a complex risk profile? By doing what big institutions do.

Long-Term Risk Analysis: How Large Institutions Measure Total Risk

  • see the risk section of this video to get an in-depth view (and link to two reports) of how DK and big institutions measure long-term risk management by companies

MSFT Long-Term Risk Management Consensus ​

Rating Agency Industry Percentile

Rating Agency Classification

MSCI 37 Metric Model 100.0%

AAA, industry leader, stable Trend

Morningstar/Sustainalytics 20 Metric Model 96.9%

21.3/100 medium-Risk

Reuters’/Refinitiv 500+ Metric Model 100.0%

Excellent, #1 In Industry

S&P 1,000+ Metric Model 58.0%

Average, Stable Trend

Just Capital 19 Metric Model 100.0%

Exceptional, #1 In the Industry

FactSet 30.0%

Below-Average, Stable Trend

Morningstar Global Percentile (All 15,000 Rated Companies) 93.8% Exceptional
Just Capital Global Percentile (All 954 Rated US Companies) 100.0%

Exceptional, #3 In the Country Among US Companies

Consensus 85%

Low-Risk, Very Good Risk-Management, Stable Trend

(Sources: MSCI, Morningstar, S&P, FactSet)

MSFT’s Long-Term Risk Management Is The 35th Best In The Master List (93rd Percentile)

Classification Average Consensus LT Risk-Management Industry Percentile

Risk-Management Rating

S&P Global (SPGI) #1 Risk Management In The Master List 94 Exceptional
Microsoft 85 Very Good
Strong ESG Stocks 78

Good – Bordering On Very Good

Foreign Dividend Stocks 75 Good
Ultra SWANs 71 Good
Low Volatility Stocks 68 Above-Average
Dividend Aristocrats 67 Above-Average
Dividend Kings 63 Above-Average
Master List average 62 Above-Average
Hyper-Growth stocks 61 Above-Average
Monthly Dividend Stocks 60 Above-Average
Dividend Champions 57 Average

(Source: DK Research Terminal)

MSFT’s risk-management consensus is in the top 7% of the world’s highest quality companies and similar to that of such other blue-chips as

  • Lockheed Martin (LMT)
  • Colgate-Palmolive (CL) – dividend king
  • Canadian Pacific Railway (CP)
  • Amgen (AMGN)
  • Adidas AG (OTCQX:ADDYY)
  • Lowe’s (LOW) – dividend king
  • Allianz SE (OTCPK:ALIZY)
  • 3M (MMM) – dividend king
  • Taiwan Semiconductor (TSM)

The bottom line is that all companies have risks, and MSFT is very good, bordering on exceptional, at managing theirs.

How We Monitor MSFT’s Risk Profile

  • 47 analysts
  • 3 credit rating agencies
  • 8 total risk rating agencies
  • 55 experts who collectively know this business better than anyone other than management
  • and the bond market for real-time fundamental risk assessments

When the facts change, I change my mind. What do you do sir? – John Maynard Keynes

There are no sacred cows at iREIT or Dividend Kings. Wherever the fundamentals lead, we always follow. That’s the essence of disciplined financial science, the math behind retiring rich and staying rich in retirement.

Bottom Line: Microsoft Is The Ultimate Wonderful Company At A Fair Price

I’m not telling you the market has bottomed (though it might have).

I’m not telling you MSFT has bottomed.

I’m not telling you that if you buy MSFT, you’re guaranteed to make money in a year.

What I am telling you is that MSFT is one of, if not the highest quality companies on earth, as close to God’s own company as can exist in this world.

And after two years of trading at extreme valuations (up to 40X earnings), the ultimate wonderful company at a fair price is finally a good buy.

Anyone buying MSFT at its current 6% discount (17.5X cash-adjusted earnings) is buying hyper-growth, and impeccable quality, and safety at a reasonable price.

You’re also buying potentially 100% returns over the next five years, roughly 2X what analysts expect from the S&P 500.

Is MSFT’s yield exceptionally high? No, but at 0.9% it matches the Nasdaq.

  • same yield as the Nasdaq
  • faster growth than the Nasdaq
  • slightly better valuation than the Nasdaq

MSFT’s 16.7% long-term return potential, similar to what it’s delivered for decades, isn’t just good, it’s exceptional.

  • Private equity will lock up your money for seven to 15 years trying to earn 15+% returns
  • Cathie Wood has incinerated tens of billions of shareholder capital trying to earn 15+% long-term returns with speculative tech names.

Today, MSFT offers you almost 17% long-term return potential from the safest company in America.

  • and the only one with three AAA stable credit ratings

I’m not a market timer, I’m not a speculator.

I am a disciplined long-term investor and can say with 80% confidence that anyone buying MSFT today is going to be pleased with the results in 5+ years.

Fortunes are made by buying right and holding on.” – Tom Phelps

MSFT is the ultimate wonderful company at a fair price, and the ultimate buy and hold forever investment.