Microsoft (MSFT)

Total return at 5 years: 3.4%/year = 2.6% appreciation + 0.9% dividend. The target price ($614) is ex-dividend; the $24 in dividends collected over 5 years are added separately.

By both methods, the value today (DCF $521 · Multiples $514) is below the market price ($541).

Today — expensive, no margin of safety: at $541 trades ~5.3% above its value discounted to today (~$514); the expected return does not even reach the risk-free rate (4.5%).

At 5 years — Preserva valor: the target price ($614) plus dividends yield just enough to preserve nominal capital, below the required 4% floor.

The bridge: the return at 5 years falls below the risk-free rate (4.5%) — which is why there is not even a discount to today's value. To require a 15% annual return, it would need to be bought at ~$321.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($541) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The implied growth (11.9%/year) is in line with our base case (11.0%/year) → the price is consistent with the projection.

That growth implies ~$186.6 bn of owner earnings in year 5 (vs ~$179.1 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). Cash accumulates the retained surplus —what is not returned as dividend or buyback—, so that EV falls and multiples compress going forward. The valuation is done on FCF maintenance. In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Rolling grid: the base year is the just-closed FY2026 fiscal year (revenue $331.8bn to Jun-2026, 10-K) and the projection is 12-month windows (+1y…+5y) — exactly 5 years from the last reported figure. The path starts at +16%, which is the fiscal year's constant-currency growth: the reported +17.8% includes 2 points of foreign-exchange tailwind that the 10-K itself declares, and that swing is treated separately rather than baked into the base. The end point (+10% by year 5) rests on contracted commercial RPO, which rose 84% to $678bn with an average duration of 2.3 years and ~30% recognizable over the next twelve months. The base-year cash margin is normalized at ~49.3% of OCF: the raw fiscal year came in at 55.1%, but it includes $14.2bn of deferred tax (the accelerated depreciation of artificial-intelligence capex) and $11.0bn of investment gains, neither of them recurring operating flow; that 49.3% reproduces owner earnings calculated from operating income. Capex climbed to $115.9bn and is projected to grow while losing intensity against sales (34.9% → 27.1%); EV/FCF maintenance falls from ~28× to ~13× as the metric compounds. Cash accumulates only the retained fraction of FCF (~27%), after the dividend and the real buyback ($22.3bn for the fiscal year, XBRL) — which at Microsoft offsets stock-based compensation dilution and leaves the share count nearly flat. Watch: whether Azure and artificial intelligence sustain the return on that capital.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (EV falls as cash increases). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $614 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $541, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $614 in 5 years plus $24 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $514. Against the current market price ($541), the margin of safety is -5.3% (trades above the maximum → a premium is paid) and the total return at that price would be 3.4% annually.

• Anchor: forward multiple on owner earnings. It is valued on EV/maintenance free cash flow and owner earnings —which expense capital expenditure and stock-based compensation—, not on EV/EBITDA or reported free cash flow; at $541 the entry multiple of 38× compresses toward 17× if growth holds.
• The discounted cash flow converges. The discounted cash flow (at the method's risk-free rate) also gives a value above the price, though below the one the exit multiple produces — the two methods point in the same direction with different headroom.
• Sensitivity — the return on capital expenditure decides. If the incremental return on artificial intelligence capital expenditure keeps falling toward the 10% bar, the exit multiple compresses and the result approaches the adverse scenario, with a considerably lower return than the base case.
• Margin of safety at the end. The base total return (+3%) is measured with the hurdle at the end, not concatenated into each assumption, and is contrasted against the reference scale: 4% floor, 10% average return and 15% great investment.
• Optionalities kept separate. The OpenAI stake and Copilot's pricing levers are valued apart from the base case (default zero), without contaminating the exit multiple or the verdict.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✓ ROIC exceeds the cost of capital (~10%)
• ✓ High incremental ROIC (compounding)
• ✓ CFROIC backs up the ROIC (85%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Strong, predictable cash flow. The fiscal year's operating cash flow (US$182.9bn) is real, not inflated by float; but it includes US$14.2bn of deferred tax from accelerated depreciation of capital expenditure and US$11.0bn of investment gains, neither recurring — which is why the model's base year normalizes the cash margin to ~49.3% rather than the raw 55.1%.
• Sustainably high ROIC. Level of 30.8% on the balance sheet's real invested capital; cash flow return on invested capital stays close to the accounting return, meaning profitability is backed by cash and not by accruals.
• Creates economic value. The return on capital comfortably exceeds the 10% bar (the market's opportunity cost): economic profit is amply positive. Reinvesting above that threshold is the engine of compounding.
• Reinvestment runway. Broad for as long as artificial intelligence computing demand lasts (Azure +41%, US$678bn of contracted revenue); the limit is whether the industry, collectively, over-invests in capacity — and this fiscal year's incremental return (16.9%) suggests the compression has already begun.
• Accounting distortions to watch. Artificial intelligence capital expenditure suppresses reported free cash flow (owner earnings, not EBITDA, is the correct metric); net income includes US$5.0bn of gains from the OpenAI stake; and operating cash flow carries US$14.2bn of deferred tax that is a payment timing difference, not profitability.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

Microsoft's engine is the cloud: Microsoft Cloud went from US$111.6bn to US$214.4bn between fiscal years 2023 and 2026, and Intelligent Cloud —where Azure sits— is the fastest-growing segment (+30% in the fiscal year, with Azure passing US$100bn annually). The model combines volume (Microsoft 365 seats, Azure consumption) times price, with the artificial intelligence layer (Copilot and Azure AI) as incremental monetization over the installed base. Productivity and Business Processes supplies the recurrence of software, while More Personal Computing (Windows, gaming, advertising) is contracting. Commercial remaining performance obligation (US$678bn, +84%) is revenue already contracted and not yet recognized: it underpins the growth projection without extrapolating the trend, although with a weighted average duration of 2.3 years only ~30% is recognized within the next twelve months.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (30-jun-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Real growth, not nominal. Revenue +17.8% reported and +16% in constant currency: the Form 10-K discloses 2 points of favourable currency tailwind, which the projection treats as a separate swing rather than baking it into the base.
• Where the engine comes from. Azure —inside Intelligent Cloud— is the engine (+41% in the fiscal year, passing US$100bn annually), driven by artificial intelligence computing consumption; Productivity and Business Processes supplies the recurrence of subscription.
• Realistic deceleration. The base case starts at +16% (the fiscal year's constant-currency growth, not the +17.8% headline) and falls to +10% by year 5 — it decelerates from recent real growth and does not extrapolate the Azure acceleration.
• Backed by contracted revenue. Commercial remaining performance obligation rose 84% to US$678bn with a weighted average duration of 2.3 years and ~30% recognizable within twelve months: the projection rests on revenue already signed, not on an extrapolated trend.
• Capital cycle / competition. The whole industry's artificial intelligence infrastructure capital expenditure is unprecedented; if computing supply outstrips demand, cloud pricing could compress despite volume. More Personal Computing, moreover, is already contracting.

• Relevant in 10 years / recurrence. Enterprise software and cloud are the world's computing infrastructure; Microsoft 365 and Azure are de facto standards with rising adoption. Commercial remaining performance obligation of US$678bn is recurrence already contracted.
• Market share / position. Azure is the world's second cloud platform (~25% share, behind Amazon Web Services ~30%) and passed US$100bn annually; Microsoft 365 is the de facto standard in enterprise productivity.
• Pricing power. High: Copilot is sold as a price increase per seat over the Microsoft 365 installed base (more than 30 million paid seats); Azure bills by consumption, which rises with artificial intelligence computing demand.
• Operating leverage. Strong: the operating margin held at 46.8% in the fiscal year even with artificial intelligence capital expenditure soaring — the software and cloud cost structure scales with revenue.
• Supply-side / capital cycle. The sector attracts an unprecedented wave of capital into artificial intelligence infrastructure; Microsoft funds its share from internal cash, but the compression of the incremental return (16.9% this fiscal year) is exactly what the capital cycle predicts when investment enters a sector.
• Behavior in recession. Subscription software is defensive (multi-year contracts, high recurrence); Azure consumption and spending on devices and gaming are more cyclical, and the latter is already contracting.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✓Leverage (net debt / EBITDA)Net cash $36.5 bn
• ✓Interest coverage (EBIT / interest)77.6x
• !Liquidity (current ratio)1.23×
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 85% of ROIC
• ✓Value creation (ROIC − 10% bar)+21pp
• !Malinvestment test (capex vs incremental ROIC)Strong investment mode 3.0x
• –Float / working capitalNeutral WC
• !Dilution (SBC % of revenue + shares)SBC 3.7% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Fortress balance sheet. Cash and short-term investments of US$76.8bn against debt of US$40.3bn — positive net cash of ~US$36.5bn; artificial intelligence capital expenditure is funded without leveraging the balance sheet.
• No pressing maturity wall. Low corporate debt relative to the size of the business, with ample repayment capacity from operating cash flow (US$182.9bn in the fiscal year).
• Concentration of investment asset. Capital expenditure is concentrated in a single asset type (artificial intelligence data centers) and net fixed assets climbed to US$313.1bn; if demand disappoints, the resale value of that capacity is limited.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• Capital allocation (ROIC). Return on invested capital of 30.8%, far above the 10% bar; a record of selective acquisitions (LinkedIn, Activision Blizzard) and sustained buybacks. Artificial intelligence capital expenditure (US$115.9bn in the fiscal year) is the test under way: the incremental return fell to 16.9%.
• Alignment / skin in the game. Low insider ownership (under 1%); Nadella is not a controlling founder. Alignment comes from the track record of execution rather than from ownership.
• Integrity / communication. It communicates artificial intelligence capital expenditure with verifiable tracking metrics (Azure growth, contracted remaining performance obligation, operating margin) and publishes net income excluding the OpenAI gains (US$128.8bn against US$133.7bn reported) — a transparency that makes the business easier to read.
• Acquisitions / diworsification. Selective and disciplined acquisitions (LinkedIn in 2016, Activision Blizzard in 2023), both within the circle of competence; no diversification outside the core business.

• The market is paying for revenue already under contract rather than for an extrapolation of the trend: commercial RPO rose 84% to US$678bn, nearly twice annual billings. A contracted base of that size sustains the multiple even as reported free cash flow falls.
• The price embeds a reading of artificial intelligence capex as investment rather than deterioration. Reported free cash flow came in at US$67.0bn —below the US$73bn of the prior year— but the operating margin held at 46.8% and Azure grew +41% in the year, accelerating to +43% in the closing quarter: the market looks through the decline in cash flow to the capacity being built.
• On reported earnings the multiple appears cheaper than it is: the year's net income includes US$5.0bn of gains from the OpenAI stake (growth is 31% with those gains and 22% without them, and the company itself publishes the figure excluding them, US$128.8bn). Part of the price rests on an earnings line flattered by a result that is not operating.
• Predictability is paid for in a company of this scale: positive net cash of ~US$36.5bn, capex financed without leveraging or diluting, and a buyback that neutralizes the dilution from stock-based compensation.

The method's question is whether the market's perception is appreciably worse than reality, and at this price the honest answer is that it is not clearly so: the market already recognizes the contracted revenue and already looks through the decline in free cash flow. Where perception and reality can still diverge is the return on new capital —the incremental fell to 16.9%— but that gap can resolve in either direction today. Without an identifiable source of discount, the price should be treated as full rather than as an opportunity.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at -6%/year (-26% total): the margin of safety protects the downside. The bull (+12%/year, +76% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• The return on AI capital expenditure compresses. Capital expenditure climbed to US$115.9bn and the incremental return on capital fell to 16.9% (against 30.8% for installed capital). It remains above the 10% bar, but the compression is the central risk of the case: if it continues, cash flow stays suppressed without the offsetting growth.
• Azure deceleration. The +41% growth depends on artificial intelligence computing demand continuing to exceed installed capacity; saturation would compress the fastest-growing segment.
• Conversion of contracted revenue. Only ~30% of the US$678bn commercial remaining performance obligation is recognized over the next twelve months; the rest depends on customers actually consuming the committed capacity across an average of 2.3 years.
• More Personal Computing is contracting. The segment fell ~1% in the fiscal year and ~4% in the closing quarter (Windows to original equipment manufacturers −7%, Xbox content −10%): it no longer contributes growth and forces the cloud to compensate.
• Net income with investment gains. The fiscal year's net income includes US$5.0bn of gains from the OpenAI stake; without them growth is 22% rather than 31%.
• Regulation / antitrust. Scrutiny of the OpenAI partnership, market power in productivity and cloud licensing practices in Europe.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A wide moat and ROIC 31% above the 10% bar, but the price sits above value (no margin) → great business, expensive.

• Peter Lynch Growth at a reasonable price (GARP)

  A fast grower growing 11% at a multiple/growth of 3.4 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 4% (EBIT/EV) + ROIC 31% → falls outside the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts 12%, in line with our 11%: perception and reality aligned.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -7%/yr, bull-scenario ceiling +11%/yr over 5y: reasonable asymmetry, without an ample cushion.

• Pat Dorsey Moat strength (Five Rules)

  A wide moat, stable; sources: switching costs, network effects, efficient scale, intangibles → passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting 12%, within what we project (11%) — the story squares with the numbers.