00:00 Should you buy Microsoft stock, ticker symbol MSFT, Microsoft just reported second quarter
00:06 earnings, revenue increased 2% to $52.7 billion and net income decreased 12% to $16.4 billion
00:14 year over year.
00:16 Based on the latest share price, Microsoft has a market cap of $1.8 trillion. With $100
00:21 billion of cash and $44 billion of long term debt, the enterprise value is roughly $1.74
00:26 trillion. Revenue over the last 12 months is $204 billion with net income of $67 billion
00:32 and $9 earnings per share that gives the company an expensive valuation of 8.5 times revenue
00:38 or 27 times earnings. Historical revenue growth meanwhile is clocking 11% over the past 10 years
00:44 and EPS growth is roughly 18%. Breaking out the earnings report, you can see that the real bright
00:50 spot is Microsoft Cloud. Cloud revenue was up 22% to $27 billion meaning cloud run rate revenues
00:56 are now over $100 billion. So cloud is now the most important part of Microsoft's business.
01:02 But again we are seeing deceleration in some areas and here's an interesting chart which
01:06 shows how slowing growth has been gradually spreading across segments over the last few
01:11 quarters. None of this is surprising of course Microsoft is exposed to higher operating costs
01:17 like almost everyone else so it's going to face the same pressures. On the plus side,
01:21 the company has a staggering amount of cash and it's invested at least $10 billion into OpenAI,
01:26 the company behind ChatGPT. This is no doubt a smart move and could help the business gain
01:31 market share in areas such as online search and cloud computing. But trading at the multiple of
01:38 8 times revenue and 27 times earnings, Microsoft is already pricing in a significant amount of
01:43 growth. Let's assume with the help of buybacks Microsoft can grow earnings per share at 15%
01:49 per year for the next 10 years, slightly lower than the historical average. Then assume the
01:53 stock trades at 25 times those earnings at the end of those 10 years. The company would be worth a
01:58 whopping $6.7 trillion in 10 years time. Including dividends that works out to an investment return
02:04 of 14.8% per year. That's a good return but there's not much margin for error and Microsoft's
02:09 size could make it hard to hit those numbers. So I'm going to give the company a neutral rating as
02:14 it looks pretty fairly valued. But these are my personal opinions not financial advice
02:19 and I've got no position in Microsoft's stock.
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