Microsoft: (NASDAQ: MSFT)
QVI Research Report | Updated Coverage | August 2023
Summary
Microsoft is a dividend-paying large-cap stock in the information technology sector’s systems software industry.
The company offers a wide range of products and services in the productivity and business processes, intelligent cloud, and more personal computing segments.
Microsoft’s fundamentals show positive revenue growth, high profit margins, and strong returns on equity and invested capital.
In this updated research report, QVI reiterates its rating on the stock in the Concentrated Portfolio.
When referencing this report, premium (paying) subscribers can access their Quality Value Investing (QVI) Glossary of Investing Terms and Metric Targets. Unless noted, all data presented is sourced from Seeking Alpha Premium as of the market close on August 18, 2023, and intended for illustration only. If reading this in your email, consider viewing in the Substack App for a more inclusive experience.
Microsoft Value Proposition
QVI Research Report’s value proposition section provides a brief synopsis of the company’s business model, major-exchange listing, stock symbol, market capitalization, and dividend-paying status. In addition, it defines the competitive advantages of a company’s products or services to its customers compared to the industry, including the stock’s historical performance vs. the sector and market.
Microsoft MSFT 0.00%↑ is a dividend-paying large-cap stock in the information technology sector’s systems software industry. MSFT was added to the QVI Concentrated Portfolio on June 28, 2011, at a dividend- and split-adjusted $20.27 a share.
Microsoft Corporation develops and supports software, services, devices and solutions worldwide.
Productivity and Business Processes segment offers office, exchange, SharePoint, Microsoft Teams, office 365 Security and Compliance, Microsoft viva, and Microsoft 365 copilot; and office consumer services, such as Microsoft 365 consumer subscriptions, Office licensed on-premises, and other office services. This segment also provides LinkedIn; and dynamics business solutions, including Dynamics 365, a set of intelligent, cloud-based applications across ERP, CRM, power apps, and power automate; and on-premises ERP and CRM applications.
Intelligent Cloud segment provides server products and cloud services, such as azure and other cloud services; SQL and windows server, visual studio, system center, and related client access licenses, as well as nuance and GitHub; and enterprise services including enterprise support services, industry solutions, and nuance professional services.
More Personal Computing segment offers Windows, including windows OEM licensing and other non-volume licensing of the Windows operating system; Windows commercial comprising volume licensing of the Windows operating system, windows cloud services, and other Windows commercial offerings; patent licensing; and windows Internet of Things; and devices, such as surface, HoloLens, and PC accessories. Additionally, this segment provides gaming, which includes Xbox hardware and content, and first- and third-party content; Xbox game pass and other subscriptions, cloud gaming, advertising, third-party disc royalties, and other cloud services; and search and news advertising, which includes Bing, Microsoft News and Edge, and third-party affiliates.
Microsoft sells its products through OEMs, distributors, and resellers; and directly through digital marketplaces, online, and retail stores. The company was founded in 1975 and is headquartered in Redmond, Washington. USA.
QVI’s value proposition elevator pitch for Microsoft:
The reigning king of productivity software, whether business, personal, cloud, or desktop.
Performance vs. Sector and Market
The chart below illustrates MSFT’s performance against the Technology Select Sector SPDR® Fund ETF (NYSE: XLK) and the SPDR® S&P 500 ETF Trust (NYSE: SPY) since being added to the QVI Portfolios in June 2011.
For example, MSFT has dramatically outperformed its sector and the broader market in total return during the coverage timeframe, compounding as a 15-bagger.
Due Diligence Resources
For a more in-depth analysis of the all-important value proposition, visit Microsoft’s investor relations webpage and its most recent Form 10-K Annual Report submitted to the US Securities and Exchange Commission or SEC.
QVI’s value proposition rating for Microsoft: Bullish.
MSFT Total Return vs. XLK and SPY
Microsoft Corp (MSFT) Total Return: +1,460.00%
Technology Sel Sec SPDR ETF (XLK) TR: +680.00%
SPDR S&P 500 ETF Trust (SPY) Total Return: +322.60%
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MSFT Shareholder Yields
QVI Research Report’s shareholder yields section uncovers the equity bond rate of the company’s common shares. It aims to quantify the yields on earnings, free cash flow, and dividends to measure how the targeted stock compares to the prevailing yield on the 10-Year Treasury benchmark note.
Earnings and Free Cash Flow Yields
MSFT’s earnings yield traded below the QVI targeted floor at 3.06%, as demonstrated in the chart below. In addition, at 2.52%, MSFT’s free cash flow yield traded well below the threshold.
As inverse valuation multiples, the weighted shareholder yields suggest that MSFT trades at a premium value to earnings and free cash flow. QVI will further explore valuation multiples later in this report.
Dividend Yield
Microsoft offers a modest forward dividend yield of 0.86%, supported by a conservative 27.73% payout ratio, thus indicating a dividend rate with plenty of room for additional annual increases.
MSFT yielded 13.42% from an annual payout of $2.72 on a split- and dividend-adjusted cost basis of $20.27 per share on June 28, 2011, the initial date of QVI’s real-time purchase of a slice of the company. Thus, the yield-on-cost basis was +1,256 basis points [bps] above the forward yield.
Average of Shareholder Yields
Quality Value Investing takes the average of the three shareholder yields to measure how the stock compares to the prevailing yield of 4.25% on the 10-Year Treasury benchmark note. For example, the average shareholder yield for MSFT was 2.15% or -210 bps below the 10-Year but 6.33% or +208 bps above the Treasury yield when using QVI’s yield-on-cost basis.
QVI’s shareholder yields rating for MSFT: Neutral.
MSFT Shareholder Yields
Microsoft Corp (MSFT) Price: $316.37
Microsoft Corp (MSFT) Earnings Yield: 3.06%
Microsoft Corp (MSFT) Free Cash Flow Yield: 2.52%
Microsoft Corp (MSFT) Dividend Yield: 0.86%
One-Year Trailing (as of Auguat 18, 2023)Microsoft Fundamentals
QVI Research Report’s fundamentals section measures the performance strength of the company’s senior management by analyzing revenue growth, net profit margin, and returns on equity and invested capital.
Revenue Growth and Net Profit Margin
Per the chart below, Microsoft had a positive three-year annualized high-single-digit revenue growth of 8.34%, in line with the 9.62% median growth of the information technology sector.
Farther down the income statement, Microsoft had a trailing three-year mid-double-digit net profit margin of 34.15%, far outperforming the sector’s median net margin of 1.99%
Returns on Equity and Invested Capital
Microsoft’s management produced a trailing three-year return on equity or ROE of 39.15%, well above the targeted threshold and outperforming the sector’s median ROE of 0.62%.
Stock buyback programs often elevate ROE. For example, Microsoft’s board of directors spent nearly $5 billion on repurchases in the quarter ending March 31 and authorized $60 billion in buybacks in fiscal 2022. However, are they buying back the shares at value prices on behalf of shareholders?
At 31.03%, Microsoft’s three-year return on invested capital, or ROIC, was well above the QVI threshold and outperformed the sector’s median ROIC of 2.09%, indicating that its senior executives are superior capital allocators.
In addition, Microsoft’s ROIC tripled its weighted average cost of capital, or WACC, of 10.24%. (Source of WACC: GuruFocus).
Positive revenue growth, high sector-beating profit margins, and returns on equity and invested capital suggest that Microsoft’s management continues its long-tailed history of second-level performance on Puget Sound.
QVI’s fundamentals rating for Microsoft: Bullish.
MSFT Returns on Management
Microsoft Corp (MSFT) Revenue Growth: 8.34%
Microsoft Corp (MSFT) Profit Margin: 34.15%
Microsoft Corp (MSFT) ROE: 39.15%
Microsoft Corp (MSFT) ROIC: 31.03%
Three-Year Trailing (as of August 18, 2023)MSFT Valuation, Risks, and Investment Thesis
Next, QVI dives into the valuation multiples, downside risks, and overall investment thesis of Microsoft Corporation (MSFT), including potential catalysts. So, let’s dig further after reading the required disclosures and background information.
Disclosure: I/we have a beneficial long position through the direct ownership of common shares of MSFT in our family portfolio. I wrote this report myself, and it expresses my own opinions. I am not receiving compensation for it other than from Substack paid subscriptions. I have no business relationship with any company whose stock is mentioned in this article.
Additional Disclosure: Quality Value Investing by David J. Waldron’s primary ticker research reports are for informational purposes only. The accuracy of the data cannot be guaranteed. Narrative and analytics are impersonal, i.e., not tailored to individual needs nor intended for portfolio construction beyond his family portfolio, which is presented solely for educational purposes. David is an individual investor and author, not an investment adviser. Readers should always engage in their own research or due diligence and consider (as appropriate) consulting a fee-only certified financial planner, licensed discount broker/dealer, flat fee registered investment adviser, certified public accountant, or specialized attorney before making any investment, income tax, or estate planning decisions.
About the Writer
David J. Waldron is the contributing editor of Quality Value Investing and author of the international-selling book Build Wealth with Common Stocks: Market-Beating Strategies for the Individual Investor. David’s mission is to inspire the achievement of his readers’ financial goals and dreams. His work has been featured on Seeking Alpha, TalkMarkets, ValueWalk, MSN Money, Yahoo Finance, QAV (Australia’s #1 Value Investing Podcast), Money Life with Chuck Jaffe, LifeBlood with George Grombacher, The Acquirer’s Multiple, Amazon.com, Barnes & Noble, Apple Books, the BookLife Prize, and Publisher’s Weekly. David received a Bachelor of Science in business studies as a Garden State Scholar at Stockton University and completed The Practice of Management Program at Brown University.
Bonus: Founding Subscribers of QVI on Substack are eligible to receive a personalized complimentary copy of the case laminate hardcover edition of the book from the author.