Dimitry Nakhla | Babylon Capital®
A quality valuation analysis on $MSFT 🧘🏽‍♂️

•NTM P/E Ratio: 29.25x
•5-Year Mean: 30.92x

•NTM FCF Yield: 1.98%
•5-Year Mean: 2.80%

As you can see, $MSFT appears to be trading near fair value on an earnings basis

Going forward, investors can expect to receive ~6% MORE in earnings per share & ~29% LESS in FCF per share🧠***

Before we get into valuation, let’s take a look at why $MSFT is a quality business

BALANCE SHEET✅
•Cash & Equivalents: $102.01B
•Long-Term Debt: $35.38B

$MSFT has an excellent balance sheet, an AAA S&P Credit Rating & 58x FFO Interest Coverage Ratio

RETURN ON CAPITAL✅
•2021: 31.1%
•2022: 34.0%
•2023: 30.9%
•2024: 29.7%
•2025: 28.0%

RETURN ON EQUITY✅
•2021: 47.1%
•2022: 47.2%
•2023: 38.8%
•2024: 37.1%
•2025: 33.3%

$MSFT has great return metrics, highlighting the financial efficiency of the business

REVENUE✅
•2021: $168.09B
•2026E: $326.83B
•CAGR: 14.22%

FREE CASH FLOW🆗*
•2021: $56.12B
•2026E: $75.70B
•CAGR: 6.17%

*This is largely due to heavy AI-related reinvestment — current 2028 FCF estimate $116.45B

NORMALIZED EPS✅
•2021: $7.97
•2026E: $16.10
•CAGR: 15.10%

SHARE BUYBACKS✅
•2016 Shares Outstanding: 8.01B
•LTM Shares Outstanding: 7.46B

By reducing its shares outstanding ~7%, $MSFT increased its EPS by ~8% (assuming 0 growth)

MARGINS✅
•LTM Gross Margins: 68.8%
•LTM Operating Margins: 46.3%
•LTM Net Income Margins: 35.7%

PAID DIVIDENDS✅
•2015: $1.24
•2025: $3.32
•CAGR: 10.34%

***NOW TO VALUATION 🧠

As stated above, investors can expect to receive ~6% MORE in EPS & ~29% LESS in FCF per share

Using Benjamin Graham’s 2G rule of thumb, $MSFT has to grow earnings at a 14.63% CAGR over the next several years to justify its valuation

Today, analysts anticipate 2026 - 2028 EPS growth over the next few years to be more than the (14.63%) required growth rate:

2026E: $16.10 (18% YoY) *FY Jun

2027E: $18.73 (16% YoY)
2028E: $22.27 (18% YoY)

$MSFT has an excellent track record of meeting analyst estimates ~2 years out, so let’s assume $MSFT ends 2028 with $22.27 in EPS & see its CAGR potential assuming different multiples

32x P/E: $712💵 … ~16.7% CAGR

30x P/E: $668💵 … ~13.9% CAGR

29x P/E: $646💵 … ~12.4% CAGR

28x P/E: $623💵 … ~10.9% CAGR

27x P/E: $601💵 … ~9.4% CAGR

As you can see, we’d have to assume a 28x multiple for $MSFT to have attractive return potential

At 27x earnings $MSFT has ok CAGR potential

$MSFT is one of the highest quality companies in the world & is firing on all cylinders

Although I wouldn’t want to rely on a >30x multiple, I feel comfortable accumulating $MSFT shares at ~$485💵 while relying on 28x - 29x

I consider $MSFT a steal with a large margin of safety at $440💵, where I can reasonably expect ~12% CAGR while assuming a more conservative 26x
___

𝐃𝐈𝐒𝐂𝐋𝐎𝐒𝐔𝐑𝐄‼️

𝐓𝐡𝐢𝐬 𝐜𝐨𝐧𝐭𝐞𝐧𝐭 𝐢𝐬 𝐩𝐫𝐨𝐯𝐢𝐝𝐞𝐝 𝐟𝐨𝐫 𝐢𝐧𝐟𝐨𝐫𝐦𝐚𝐭𝐢𝐨𝐧𝐚𝐥 𝐚𝐧𝐝 𝐞𝐝𝐮𝐜𝐚𝐭𝐢𝐨𝐧𝐚𝐥 𝐩𝐮𝐫𝐩𝐨𝐬𝐞𝐬 𝐨𝐧𝐥𝐲 𝐚𝐧𝐝 𝐝𝐨𝐞𝐬 𝐧𝐨𝐭 𝐜𝐨𝐧𝐬𝐭𝐢𝐭𝐮𝐭𝐞 𝐢𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 𝐚𝐝𝐯𝐢𝐜𝐞, 𝐚𝐧 𝐨𝐟𝐟𝐞𝐫, 𝐨𝐫 𝐚 𝐬𝐨𝐥𝐢𝐜𝐢𝐭𝐚𝐭𝐢𝐨𝐧 𝐭𝐨 𝐛𝐮𝐲 𝐨𝐫 𝐬𝐞𝐥𝐥 𝐚𝐧𝐲 𝐬𝐞𝐜𝐮𝐫𝐢𝐭𝐲.

𝐁𝐚𝐛𝐲𝐥𝐨𝐧 𝐂𝐚𝐩𝐢𝐭𝐚𝐥® 𝐚𝐧𝐝 𝐢𝐭𝐬 𝐫𝐞𝐩𝐫𝐞𝐬𝐞𝐧𝐭𝐚𝐭𝐢𝐯𝐞𝐬 𝐦𝐚𝐲 𝐡𝐨𝐥𝐝 𝐩𝐨𝐬𝐢𝐭𝐢𝐨𝐧𝐬 𝐢𝐧 𝐭𝐡𝐞 𝐬𝐞𝐜𝐮𝐫𝐢𝐭𝐢𝐞𝐬 𝐝𝐢𝐬𝐜𝐮𝐬𝐬𝐞𝐝. 𝐀𝐧𝐲 𝐨𝐩𝐢𝐧𝐢𝐨𝐧𝐬 𝐞𝐱𝐩𝐫𝐞𝐬𝐬𝐞𝐝 𝐚𝐫𝐞 𝐚𝐬 𝐨𝐟 𝐭𝐡𝐞 𝐝𝐚𝐭𝐞 𝐨𝐟 𝐩𝐮𝐛𝐥𝐢𝐜𝐚𝐭𝐢𝐨𝐧 𝐚𝐧𝐝 𝐬𝐮𝐛𝐣𝐞𝐜𝐭 𝐭𝐨 𝐜𝐡𝐚𝐧𝐠𝐞 𝐰𝐢𝐭𝐡𝐨𝐮𝐭 𝐧𝐨𝐭𝐢𝐜𝐞.

𝐈𝐧𝐟𝐨𝐫𝐦𝐚𝐭𝐢𝐨𝐧 𝐡𝐚𝐬 𝐛𝐞𝐞𝐧 𝐨𝐛𝐭𝐚𝐢𝐧𝐞𝐝 𝐟𝐫𝐨𝐦 𝐬𝐨𝐮𝐫𝐜𝐞𝐬 𝐛𝐞𝐥𝐢𝐞𝐯𝐞𝐝 𝐭𝐨 𝐛𝐞 𝐫𝐞𝐥𝐢𝐚𝐛𝐥𝐞 𝐛𝐮𝐭 𝐢𝐬 𝐧𝐨𝐭 𝐠𝐮𝐚𝐫𝐚𝐧𝐭𝐞𝐞𝐝 𝐚𝐬 𝐭𝐨 𝐚𝐜𝐜𝐮𝐫𝐚𝐜𝐲 𝐨𝐫 𝐜𝐨𝐦𝐩𝐥𝐞𝐭𝐞𝐧𝐞𝐬𝐬. 𝐏𝐚𝐬𝐭 𝐩𝐞𝐫𝐟𝐨𝐫𝐦𝐚𝐧𝐜𝐞 𝐝𝐨𝐞𝐬 𝐧𝐨𝐭 𝐠𝐮𝐚𝐫𝐚𝐧𝐭𝐞𝐞 𝐟𝐮𝐭𝐮𝐫𝐞 𝐫𝐞𝐬𝐮𝐥𝐭𝐬.
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Quartr
Edge #69: Duolingo

How does a nagging green owl translate into one of the strongest subscription businesses in consumer tech?

Coming to your inbox in a few hours. https://t.co/C0UaWhfHSJ
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Wasteland Capital
What exactly is the conclusion from the @michaeljburry GPU depreciation case? People will need to buy more (or less?) GPUs because they get older faster (or slower?) than current market expectations? What is his trade? I don’t get it.
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Fiscal.ai
ServiceNow CEO Bill McDermott:

"It used to be the Mag7. Now there's a new category. I'm calling this the Super 8. That's the Mag7 plus ServiceNow. That's right, the Super 8."

$NOW https://t.co/kts5UMF8Gx
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Quiver Quantitative
Wow.

Earlier this year, a stock trade by Representative Robert Bresnahan caught our eye.

We posted this report.

$CRDO has now risen 141% since his trade. https://t.co/aNLyllpB4k
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Quiver Quantitative
UPDATE: Last year, we noticed a suspicious trade made by Representative Debbie Wasserman Schultz.

We posted this report.

$HL has now risen 229% since the trade was made: https://t.co/QWVp8UtbnQ
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App Economy Insights
💡 Insights you might have missed

🧬 Abbott buys Exact Sciences
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📉 What’s actually priced in

Free article just dropped 👇
https://t.co/bB4sY62mNv
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EndGame Macro
How the U.S. Went From Building Capacity to Borrowing It

When energy use is rising and debt to GDP is falling, the country is physically expanding. You’re adding real output with more goods, more infrastructure, more capacity and the debt burden shrinks because the productive base is getting bigger underneath it. That’s the we grew our way out of debt era.

But once you move into the mid 80s and especially the 2000s, the picture flips. Total US energy use basically goes flat, yet debt to GDP surges. That’s the growth you get when credit expansion and asset inflation are doing the heavy lifting instead of physical throughput. Same amount of real energy, way more financial claims on top of it. That’s why it gets framed as nominal growth born out of currency debasement rather than new production.

A More Complete Read

The chart is useful, but there’s more happening beneath the surface. Energy isn’t the whole story, it’s just the simplest physical proxy for real growth.

A few things complicate the picture…
•The US economy became radically more efficient. A unit of energy today produces far more output than in 1950. Software, biotech, and services don’t show up in BTU counts the way steel mills did.

•We outsourced a ton of energy burn. A lot of the flatline is just because the heavy lifting moved overseas. US consumption still relies on rising global energy, it just doesn’t happen inside US borders.

•The debt surge isn’t only monetary policy; it’s demographics and politics. An aging population, slower labor force growth, and a preference for smoothing the decline through credit and asset inflation created a long term upward push on debt/GDP.

•Not all debt is created equal. Postwar debt built highways, factories, homes. A lot of today’s debt funds transfer payments, financial engineering, and the cost of maintaining living standards that no longer match the underlying productive capacity.

We went from a physically expanding economy to a financially leveraged one. But the deeper takeaway is that the US is trying to run a 1950s style debt and entitlement load on a 2020s energy base and demographic reality. And that mismatch forces policymakers into a corner where mild debasement and financial repression become the default path.

That’s the real story hiding in the chart.

Chart #2
Red=debt to GDP
Yellow=total US energy consumption (Q/BTU) https://t.co/9CCQnVuuTB - CH
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