DISCLOSURE: THIS POST MAY CONTAIN AFFILIATE LINKS, MEANING I GET A COMMISSION IF YOU DECIDE TO MAKE A PURCHASE THROUGH MY LINKS, AT NO COST TO YOU. PLEASE READ MY DISCLOSURE FOR MORE INFO.

‍

Past Performance

Consider this – a purchase of just 100 shares of Microsoft stock at the $21 per share offering price in 1986 (a $2,100 money investment) would have ballooned to an approximate value of $750,000 by 2011.[1]  Further, an investment of $1,000 in Microsoft stock years later in March 2011 would have still grown to a value $11,504 with an annual rate of return of 27.62% in March of 2021.

‍

Clearly, Microsoft is an exceptional company with extraordinary business economics! And earlier investment in this company proved to be an excellent vehicle for not only preserving capital but also real wealth creation.

‍

Operating History

‍

Microsoft’s business consists of 3 operating segments:

‍

1. Productivity & Business Processes
2. Intelligent Cloud
3. More Personal Computing

‍

Each segment is performing well, with solid growth experienced in (fiscal year) FY22 vs FY21:  Intelligent Cloud revenue increased driven by Azure and other cloud services. Productivity and Business Processes revenue increased driven by Office 365 Commercial and LinkedIn. More Personal Computing revenue increased driven by Search and news advertising and Windows.

‍

‍

Based on some top-level financial analysis, gross margins, operating margins, and return on capital employed have all marched up and to the right. And, the stock's performance has handily surpassed both the S&P500 and the NASDAQ over the past 5 years.

‍

The question now – does an investment in Microsoft remain appealing?

‍

Future Prospects

As mentioned previously, past performance doesn’t necessarily guarantee future performance. However, it is surely a solid indicator! But there are several things to consider. Clearly, the company has demonstrated a solid track record with strong long-term business economics, so let’s take a look at Microsoft in 2022.

‍

If you have any work experience using a computer in a variety of both business and personal settings, you're already very familiar with Microsoft's products and their tremendous benefits!  From MS Office to Power BI, its Dynamics365 system, and its Azure cloud services, Microsoft persists in churning out innovative and unique products that increase productivity and efficiency. Their corporate customer base remains internationally strong and seemingly ever-growing.  Like many others who regularly conduct analysis, I am almost attached to the hip of Excel! It is a powerful tool for spreadsheet analysis and record keeping irrespective of industry.

‍

‍

Microsoft's research and development (R&D) efforts focus on three areas going forward:

‍

• Reinvent productivity and business processes.
• Build the intelligent cloud and intelligent edge platform.
• Create more personal computing.

‍

All 3 segments experienced solid growth in FY22 versus the prior year and are poised for continued growth going forward.  Revenue in the Productivity and Business Processes segment grew 18% versus FY21. The global cloud computing market is expected to grow at a 17.9% CAGR through 2028 to a size of $791B according to Fortune Magazine, creating apt opportunity for Microsoft to experience growth in this area.  

‍

Advertising

Microsoft also has a strong advertising business via partnership with Netflix, its Bing platform, and LinkedIn.  It believes it can grow it's advertising business to $20B in revenue a year. LinkedIn revenue and advertising showed strong growth rates in FY2022, with total revenue increasing by 26% versus the prior year and advertising having grown by 15%.  

‍

Gaming

Microsoft also retains a strong position in the gaming market, with its Xbox console commanding a 20% market share, expected to grow to 27% by 2026. They're also intending to transform gaming via a new concept called "cloud gaming," enabling users to play their games when and where they want without the need for specific hardware.

Digital Transformation

And the need for digital transformation remains strong and urgent. Microsoft has a track record of creating innovative products that help improve productivity and collaboration, and according to the 2022 annual report, they are investing significant resources in:

‍

• Transforming the workplace to deliver new modern, modular business applications, drive deeper insights, and improve how people communicate, collaborate, learn, work, play, and interact with one another.
• Building and running cloud-based services in ways that unleash new experiences and opportunities for businesses and individuals.
• Applying AI to drive insights and act on our customer’s behalf by understanding and interpreting their needs using natural methods of communication.
• Tackling security from all angles with our integrated, end-to-end solutions spanning security, compliance, identity, and management, across all clouds and platforms.
• Inventing new gaming experiences that bring people together around their shared love for games on any devices and pushing the boundaries of innovation with console and PC gaming by creating the next wave of entertainment.
• Using Windows to fuel our cloud business, grow our share of the PC market, and drive increased engagement with our services like Microsoft 365 Consumer, Teams, Edge, Bing, Xbox Game Pass, and more.

‍

Competitive Advantage

From my perspective, one of the biggest things to assess for its future prospects is whether Microsoft retains a truly, durable competitive advantage in the business landscape.  Can it continue to stand the test of time and weather the ups & downs of the economy and the market going forward?

‍

ROE

I’ll start first by assessing Microsoft’s return on equity (ROE), and I’ll look at that for the past 5 years.  ROE was 44% in fiscal year 2022, and it has grown 215% over the past 5 years which is phenomenal!  The average ROE for an American corporation over the last 50 years has been approximately 12%.  So, Microsoft is consistently performing above average in that regard.  A company with a durable competitive advantage generally demonstrates a consistently high ROE.

‍

ROTC

We can’t just look at return on equity (ROE) since some companies may deliberately shrink their equity base with large dividends and share repurchases – bonuses for shareholders!  As such, we also have to analyze return on total capital (ROTC) or return on invested capital. So, we are looking for a consistently high rate of return on equity and a consistently high rate of return on total capital.

‍

While levels of ROTC are lower than levels of ROE (as expected), they have been consistently high over the past 5 years, with a 22.4% return on total capital in the most recent fiscal year of 2022 (FY22).

‍

‍

What’s more is that Microsoft demonstrates superior levels of ROE and ROTC as compares to the sector median, as well as in other meaningful operating metrics such as EBIT Margin, EBITDA Margin, and return on assets (ROA), reflecting competitive advantage against their rivals.

‍

‍

Microsoft uses strong brand equity and broad differentiation, with unique products sold to a wide variety of customers, as its overall strategy for competitive advantage. It’s large licensing and subscription base, and its strong brand affords Microsoft the ability to increase the prices of its products right along with inflation without experiencing a decline in demand.  I see Microsoft as fairly resistant to recession because of the tremendous importance of its products and services to a large portfolio of global corporations and small businesses. 

‍

• Microsoft's intellectual property—specifically, its patents and proprietary software code—contribute to the depth of its moat.
• Microsoft has what Warren Buffett calls a strong moat: competitive advantages that protect it from rivals and enable its large profits.
• Microsoft's brand name is a significant part of its moat.
• ‍

Another very attractive characteristic of the company’s financials is the fact that long-term debt (LTD) is declining year-over-year, and current LTD exists at less than 5 times current earnings.  Companies with a proven durable competitive have strong earnings that would allow them to relatively quickly pay off long-term debt.

‍

‍

Conclusion

In full transparency, I must disclose that I personally own stock in Microsoft, and I've seen that investment perform very well since becoming a shareholder. There is certainly a lot more data and information related to the company that could potentially be studied and evaluated, including performing a bottoms-up valuation of the company. But the level of research and analysis that has been pulled together thus far, especially considering Microsoft’s solid operating history and its enduring competitive advantage, suggests that the company’s stock has been one of the best ways to make money and does indeed remain a solid investment.  Currently, MSFT stock is trading at $236 per share, and the future of the company for the foreseeable future looks bright.

‍

Pricing

I don't recommend being overly concerned with the stock price you pay for any company. However, the price you pay does aid in the ultimate return on investment (ROI) experienced.  

‍

In general, you definitely do not want to pay an exorbitant price based on stock momentum.  Avoid buying into positions when the market is at full throttle. But a sensible price for a company with excellent long-term business economics that is consistently performing strongly is really all you need.

‍

And if the stock's price of such a company has recently been beaten down, that may be a great buying opportunity!  You can almost never perfectly time the market. So, it is beyond challenging to come up with a price for a stock and attempt to monitor the market with the intent of buying it at the price you’ve established.

‍

But after conducting solid investment analysis and identifying an excellent business (such as Microsoft) in which to invest, take advantage of downturns in the stock’s price, oftentimes driven any which way not by company fundamentals but rather fears of recession, interest rates, other economic factors, and market over(under)-reactions to various events. The companies you identify as good investment prospects will have solid fundamentals, a long history of superior performance, and a stable management, and that stability point toward a high probability of performing well in the future just as they have in the past.  Given enough time, the stock’s future price/value will ultimately align with the company’s long-term economics.

‍

Looking at Microsoft now, the current price weakness results in a great buying opportunity!!

At this time, MSFT is well off of its 52-week high of $349 per share (meaning that at some point in the last year, it was actually trading on the market at $349 per share). The 52-week low is $219 per share, so $236 per share (today’s trading price) is much closer to the 52-week low as opposed to its high. Also, the price-to-earnings (P/E) ratio is 23.76, which is also reasonable compared to competitors like Apple and Oracle, etc.

‍

Based on the above analysis, and from my perspective, MSFT truly remains an excellent stock investment opportunity, and now at a $236 per share level would be a good time to invest for the long-term.

‍

‍

Disclosure/Disclaimer

The information provided on this site is based on my own personal experience, research, and analysis, and it is not to be construed as professional advice. Please conduct your own research before making any investment decisions.  I am not a professional financial advisor, stockbroker, or planner, nor am I a CPA or a CFP. The contents of this site and the resources provided are for informational and entertainment purposes only and do not constitute financial, accounting, or legal advice. The author is not liable for any losses or damages related to actions or failure to act related to the content on this website.

[1] McNamara, Paul. "If You Had Bought 100 Shares of Microsoft 25 Years Ago..."NetworkWorld. NetworkWorld Inc., 10 Mar. 2011. Web. 1 Oct. 2022.

[2] Harris, J. (2021, March 16). If you invested $1,000 in Microsoft 10 years ago, here's how much you'd have now. If You Invested $1,000 In Microsoft 10 Years Ago, Here's How Much You'd Have Now. Retrieved October 28, 2022, from https://www.aol.com/news/invested-1-000-microsoft-10-131255225.html#:~:text=If%20you'd%20invested%20%241%2C000,of%20%2410%2C504.83%20from%20that%20investment.