Microsoft Stock: Don’t Waste Your Money (NASDAQ: MSFT)



Thesis article

Microsoft (NASDAQ: MSFT) is a very high-quality company with tailwinds for growth that looks poised to deliver compelling long-term total returns from current levels. And yet, notorious short seller Hedgeye recently recommended Microsoft as compelling short idea. I don’t believe MSFT is a great short-term choice at current valuations, as I will discuss in this article, and I think shorting Microsoft might be a losing idea. Both from a valuation perspective and from a company quality perspective, there are much better short ideas available for those wishing to short individual stocks.

One of the highest quality companies in the world

I believe Microsoft can be described as an excellent quality company. This belief is based on several factors. The first is Microsoft’s excellent track record. As one of only two companies in the world, it has a AAA credit rating, the other being Johnson & Johnson (JNJ). In other words, the rating agencies believe that a default by Microsoft is less likely than a default by the US government, which shows the exceptionally low financial risks for Microsoft.

Microsoft balance sheet

Microsoft 10-K

The company has a net cash position of $58 billion, as we can see in the excerpt above from Microsoft’s latest 10-K. This equates to about 4% of the company’s current market cap, which is a much stronger cash balance than most other companies.

Microsoft has plenty of other strengths besides that though. Its returns on capital and its margins are excellent, for example:

MSFT profit margin, ROCE, ROE
Data by Y-Charts

Microsoft’s net profit margin sits at a very high 37%, which has several advantages. First, it means Microsoft will make a lot of money from the incremental sales, which means growing the business is very profitable for investors over time. In addition, the very high profit margin protects Microsoft from slowdowns. If inflation (say, for employee compensation) were to hurt Microsoft’s profit margins by a few hundred basis points, the company could easily afford that. A company operating with low profit margins would see its net profits devastated in the same scenario.

Microsoft’s quality is also highlighted by its recession resilience. Many company products are essential to business and the way we live our lives, such as the Windows operating system and the Microsoft Office suite. Unsurprisingly, MSFT has seen its revenues remain very resilient in the face of past crises:

MSFT annual turnover
Data by Y-Charts

Since the company went public about 40 years ago, there has been virtually no drop in revenue. During the Great Recession and in 2016, revenues dipped slightly, but that was by far not enough to significantly threaten the company’s profitability. The company therefore also did not have to cut its dividend at this time, although it should be noted that its dividend yield is rather low, which makes MSFT far from a great income choice. Still, the resilience against recessions and other types of macroeconomic issues such as the pandemic is excellent for long-term holders, especially those looking for a choice to sleep well at night.

Last but not least, Microsoft has also put in place strong management. Its current CEO, Satya Nadella, has guided the company very well for years and has identified clear growth trends such as mobile and cloud computing.

MSFT Insider Ownership
Data by Y-Charts

Insiders own just over 6% of the company, and that amount has steadily increased over the years. This equates to approximately $100 billion that insiders have invested in the company, leading to strong alignment with other shareholders – so there is little risk of company executives pursuing strategies that will not create no value to business owners.

So Microsoft is a high quality company, but there are two other reasons why I think bypassing MSFT is far from a good idea here.

Microsoft has compelling growth prospects

First, the company is expected to see tremendous growth in business and even stronger growth in earnings per share over the next few years. As we’ve seen before, recessions have virtually no impact on Microsoft, so the current economic downturn doesn’t seem like much cause for concern. Over the long term, several macroeconomic trends are poised to lead to significant revenue gains for the company. Along with Azure, Microsoft is one of the world’s leading cloud computing companies. The cloud computing market is expected to grow at an annual rate of 16% between 2022 and 2028 according to this study. As one of the major players in this space, Microsoft is expected to get a significant share of the market opportunity to be created.

Its legacy Windows and Office businesses will see less growth, but will still see some growth. Price increases and some new customer additions, for example due to digitalization in developing countries, should enable a significant growth rate, although double-digit revenue gains are unlikely in these segments over the long term. . Microsoft’s gaming business isn’t yet too big relative to the company’s overall size, but continues to grow, and its pending acquisition of Activision Blizzard (ATVI) should further accelerate Microsoft’s growth potential. Microsoft in this space, thanks to MSFT’s access to a solid IP address and ATVIs. Talent.

Between these growth engines, Microsoft is expected to see double-digit revenue growth every year through 2030:

MSFT revenue growth

Looking for Alpha

Of course, forecasting revenues in 5 or 8 years comes with considerable uncertainty. So let’s assume that actual growth is only half of that expected, even though Microsoft has a history of beating expectations – it has exceeded revenue estimates in 9 of the last 10 quarters. If revenue growth is only half as high as expected, this would translate to an annual growth rate of around 6%. It would still be far from bad. Earnings per share growth is expected to be higher, due to the impact of share buybacks. With Microsoft trading today at a low earnings multiple of 20, it can repurchase shares at a fairly significant pace.

Repurchases of MSFT TTM shares
Data by Y-Charts

Buybacks totaled $31 billion over the past year, or about 2% of the company’s market capitalization. However, the redemption amount has been steadily increasing, which is why I believe that future redemptions will be higher. But even with 2% of its shares repurchased per year, Microsoft’s earnings per share would likely grow at an 8% pace under the 6% revenue growth scenario.

So when we expect MSFT to massively underperform expectations and grow only half of forecast, even though MSFT has a track record better than expected, Microsoft is still expected to post high single-digit growth in earnings per share. Shorting unprofitable companies, or those with declining earnings, seems like a better idea to me than shorting highly profitable companies with good earnings growth prospects that can repurchase shares at a brisk pace.

Microsoft: the evaluation is not demanding

Last but not least, there’s one last reason why I think Microsoft is far from big shorts today. In fact, I think MSFT is suitable for a long investment at current prices.

The company’s valuation was quite high a year ago, but has come down to a very reasonable level lately:

MSFT PE Ratio Forward, median 3 years, 5 years, 10 years
Data by Y-Charts

At current prices, Microsoft is trading for a low earnings multiple of 20, while next year’s earnings multiple is even lower at just 19. This is, I believe, an inexpensive valuation for a company of high quality with compelling growth prospects. What’s more, very tellingly, this represents a sharp discount to how Microsoft has been valued over the past three and five years. In fact, its valuation could increase by almost 50% for the company to trade in line with the averages of the last 3 and 5 years. The median 10-year earnings multiple is lower, but still around 20% higher than the company’s current valuation. This suggests that now is a relatively good time to add shares of Microsoft. At the same time, with MSFT trading below the historical valuation norm today, the timing seems rather inappropriate to take a short position. Microsoft was trading at a historically high earnings multiple of 36 at the start of the year – that would have been a much better sell at the time. But stocks have fallen over 30% since then, and now they don’t look like good shorts at all, I believe.


Microsoft is a big company with compelling long-term growth prospects. At the same time, its current valuation is below the historically normal range today. So I think now is a bad time to take a short position in Microsoft stock, especially since it has proven to be very resilient to past recessions.

Of course, every stock could go down during a continued market downturn. But if you want to speculate on it, shorting the indices might be a better idea. Alternatively, shorting unprofitable or highly leveraged companies could be a solid way to play a continued market downturn. But shorting one of the highest quality companies in the world when it’s trading at a steep discount to how it was valued doesn’t strike me as a good strategy – it could lose a lot of money. money to short sellers.


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