Dimitry Nakhla | Babylon Capital®
“ $MSFT has large margin of safety at $420💵, where I can reasonably expect ~13% CAGR while assuming a more conservative 25x ” https://t.co/5rGIiHiHa1

A quality valuation analysis on $MSFT 🧘🏽‍♂️

•NTM P/E Ratio: 27.29x
•3-Year Mean: 30.51x

•NTM FCF Yield: 2.09%
•3-Year Mean: 2.46%

As you can see, $MSFT appears to be trading below fair value on a forward earnings basis

Going forward, investors can expect to receive ~12% MORE in earnings per share & ~18% LESS in FCF per share🧠***

Before we get into valuation, let’s take a look at why $MSFT is a super 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 strong 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: $75.05B
•CAGR: 5.98%

*This is largely due to heavy AI-related reinvestment — current 2028 FCF estimate $116.45B — worth noting operating cash flow increases underscore $MSFT efficient AI infrastructure scaling validating high ROI-potential

NORMALIZED EPS✅
•2021: $7.97
•2026E: $16.26
•CAGR: 15.32%

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 ~12% MORE in EPS & ~18% LESS in FCF per share

Using Benjamin Graham’s 2G rule of thumb, $MSFT has to grow earnings at a 13.65% 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 (13.65%) required growth rate:

2026E: $16.26 (19% YoY) *FY Jun

2027E: $18.75 (15% YoY)
2028E: $22.31 (19% YoY)

$MSFT has an excellent track record of meeting analyst estimates ~2 years out, so let’s assume $MSFT ends 2028 with $22.31 in EPS & see its CAGR potential assuming different multiples

30x P/E: $669💵 … ~17.9% CAGR

29x P/E: $647💵 … ~16.3% CAGR

28x P/E: $625💵 … ~14.7% CAGR

27x P/E: $602💵 … ~13.0% CAGR

26x P/E: $580💵 … ~11.3% CAGR

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

At 26x - 27x earnings $MSFT has ok CAGR potential

If $MSFT multiple expands slightly, >15% CAGR

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

Today at $454💵 $MSFT appears to be a strong consideration for investment with a decent margin of safety

$MSFT has large margin of safety at $420💵, where I can reasonably expect ~13% CAGR while assuming a more conservative 25x
___

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 𝐠𝐮𝐚𝐫𝐚[...]

𝐧𝐭𝐞𝐞𝐝 𝐚𝐬 𝐭𝐨 𝐚𝐜𝐜𝐮𝐫𝐚𝐜𝐲 𝐨𝐫 𝐜𝐨𝐦𝐩𝐥𝐞𝐭𝐞𝐧𝐞𝐬𝐬. 𝐏𝐚𝐬𝐭 𝐩𝐞𝐫𝐟𝐨𝐫𝐦𝐚𝐧𝐜𝐞 𝐝𝐨𝐞𝐬 𝐧𝐨𝐭 𝐠𝐮𝐚𝐫𝐚𝐧𝐭𝐞𝐞 𝐟𝐮𝐭𝐮𝐫𝐞 𝐫𝐞𝐬𝐮𝐥𝐭𝐬. - Dimitry Nakhla | Babylon Capital® tweet

Startup Archive
DoorDash founder Tony Xu: "You can't compete against an incumbent on their territory”

Tony argues:

“You have to find something where they're not incentivized to do it (Innovator's dilemma)… and you have to find an area where you think you can be advantaged.”

For DoorDash, this was end-to-end delivery and focusing on suburbs rather than cities. The incumbents at the time didn’t want to touch end-to-end delivery because it was lower margin. Incumbents also focused on cities because of the network density, but DoorDash realized the market outside of city centers was actually the bigger opportunity because that’s where most people lived.

“Knowing where the market is and knowing structurally why that's different and why that might be difficult for a competitor to serve, that's pretty important. Now, you also have to be correct on that bet… [Our bet on serving suburbs] turned out to be correct. But we didn't know that a priori.”

Tony’s other piece of advice is that you have to be “super fast”. A key advantage versus incumbents is that they have to make capital allocation decisions across their many businesses. But you probably only have one product so you should be able to move much faster:

“Focus is actually really easy… You’ve got to build that one product”

Video source: @khoslaventures (2024)
tweet

Dimitry Nakhla | Babylon Capital®
The last four instances $MSFT fell >11% & the subsequent CAGR:

3/16/2020 → 22%
7/19/2013 → 25%
1/22/2009 → 23%
4/28/2006 → 17%

Of course past performance never guarantees future results, yet it’s a fun exercise that helps illustrate the potential when buying amid fear. https://t.co/U0YcKeUhrk

Worst selloffs in Microsoft history:
- Crash of 87
- Tech crash
- GFC
- Covid
- Azure misses buyside bogey https://t.co/5PxMVrdxq9 - modest proposal
tweet

Clark Square Capital
RT @deusexdividend: You are not an above-average investor. You rode the coattails of the largest global quantitative easing program in history. The asset price bubble will deflate and you will be forced to move back into your mom's basement. At least there will be pizza rolls

Hit me with the harshest reality truth. https://t.co/fgIWAtqP4u - lyrify
tweet

Dimitry Nakhla | Babylon Capital®
RT @DimitryNakhla: There are several respected investors who have long stayed away from companies like $GOOG, $AMZN, $MSFT & $META — skeptical of the returns on the enormous capital expenditures tied to cloud and AI infrastructure.

I understand the concern, but I don’t think that’s the right conclusion.

These businesses are building the digital backbone of the next decade, and exposure to them still remains beneficial.

At the same time, I’ve found it important to balance those “builders” with the cash cows — $MA, $V, $SPGI, $FICO etc — businesses with exceptional FCF margins, durable moats, and minimal capital requirements.

𝐓𝐡𝐚𝐭 𝐜𝐨𝐦𝐛𝐢𝐧𝐚𝐭𝐢𝐨𝐧 𝐚𝐥𝐥𝐨𝐰𝐬 𝐚 𝐩𝐨𝐫𝐭𝐟𝐨𝐥𝐢𝐨 𝐭𝐨 𝐩𝐚𝐫𝐭𝐢𝐜𝐢𝐩𝐚𝐭𝐞 𝐢𝐧 𝐭𝐡𝐞 𝐀𝐈 𝐚𝐧𝐝 𝐜𝐥𝐨𝐮𝐝 𝐛𝐮𝐢𝐥𝐝𝐨𝐮𝐭 𝐰𝐡𝐢𝐥𝐞 𝐫𝐞𝐦𝐚𝐢𝐧𝐢𝐧𝐠 𝐫𝐞𝐬𝐢𝐥𝐢𝐞𝐧𝐭 𝐢𝐟 𝐭𝐡𝐞 𝐂𝐚𝐩𝐄𝐱 𝐜𝐲𝐜𝐥𝐞 𝐜𝐨𝐨𝐥𝐬 𝐨𝐫 𝐬𝐞𝐧𝐭𝐢𝐦𝐞𝐧𝐭 𝐬𝐡𝐢𝐟𝐭𝐬.

The builders power the future; the cash cows become even more efficient by leveraging AI within their own operations — expanding margins, driving automation, & compounding value quietly in the background.

Lately, we’ve seen many quality compounders sold down to compelling valuations, while capital has chased anything labeled “AI,” even pre-revenue businesses now worth tens of billions.

𝘛𝘩𝘢𝘵 𝘥𝘺𝘯𝘢𝘮𝘪𝘤 𝘭𝘪𝘬𝘦𝘭𝘺 𝘸𝘰𝘯’𝘵 𝘭𝘢𝘴𝘵 𝘧𝘰𝘳𝘦𝘷𝘦𝘳.

Eventually, when the market begins to see cracks in AI-related CapEx or re-evaluates growth expectations, capital will likely rotate back toward predictable, high-margin compounders quietly executing in the background.

It’s not about being contrarian against AI — it’s about being contrarian within quality.

The great opportunities often come from owning world-class businesses everyone’s temporarily disinterested in.
tweet

God of Prompt
RT @prompt_copilot: Grammarly fixes your writing.

💫 https://t.co/7vzwuTo8vA fixes your prompts.

> Prompt enhancement
> Autocomplete
> Context profiles

Chrome extension for ChatGPT, Gemini, Perplexity.

Start your free trial 👉 https://t.co/TKMMCzVWj1 https://t.co/gZhh1ozINU
tweet