Microsoft Corporation

On 23 June we published our first report on Microsoft at $367.34. It was the first analysis on this site, and it is the one we have pointed most readers to since. It said the business was wonderful, the price was fair and the margin of safety thin, and it concluded "Keep watching" — begin buying in earnest in the low $300s, with a price alert at $310.

The share price today is $497.93. Before we say anything about Microsoft, we owe you an account of ourselves.

Four right, two half-right, and two wrong — and the two wrong ones are the ones that cost a reader money. We understood the business. We misjudged what to do about the price. That is a more useful failure to study than most, and it gets its own part before we go on.

The dials move accordingly: Management 9 → 8 (the capital-spending bet has grown and the dividend slowed), Financial strength 10 → 9 (net cash has become net debt once leases are counted), and Valuation 6 → 4 on a price 36% higher. The global score goes from 8.3 to 7.6 — the business did not get worse; the price got fuller.

Read the June scorecard again. Its headline was "A wonderful business — now at a fair, not foolish, price." Its valuation section put the honest intrinsic range at $300–$370. And then its verdict asked readers to wait for the low $300s, and set an alert at $310 — below the bottom of the range we had just called fair.

Those three sentences cannot all be acted on. If the price is inside your estimate of value for a business you would like to own forever, the instruction to wait for fifteen per cent less is not caution. It is a second, stricter test that nobody set out to apply, and it was applied to the one company on this board we were most certain about.

★ "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." We quoted the spirit of that line in June and then did the opposite. Buffett has told the story of stopping his purchases of Walmart in the 1990s because the price rose slightly — a piece of thumb-sucking he later reckoned cost Berkshire around $10 billion. Ours cost less and was cheaper to make: a few words in a verdict. But it is the same mistake, and it is the more common one for careful investors, because it feels like discipline.

What we should have written. The June analysis had the ingredients for a better call: a business scored 9, 9, 10 and 9 on four of five dials, a price inside our own range, and a thin but real margin of safety at the bottom of it. The right verdict was "Begin buying; add on weakness" — a starting position at a fair price, with the weakness as an opportunity to add rather than a condition for starting. At $349.20 two days later, that reader would be up 43%.

★ The rule we are adding to our own playbook, and which every future report on this site will follow: when the price sits inside our stated intrinsic range for a business we score 8 or above on quality, the verdict may not require a price below that range. We can say "wait" for a fair business at a fair price, or for a wonderful business at a foolish one. We may not say it for a wonderful business at a fair price.

That rule applies to this report too, and it is why the zone we name at the end is a fair price, not a bargain one.

Microsoft's fiscal year ended on 30 June. It reported on 29 July: revenue $331.8bn (+18%), operating income $155.2bn (+21%, a 46.8% margin), net income $128.8bn excluding OpenAI (+22%), $17.28 a share. In the fourth quarter alone revenue was $90.0bn, Microsoft Cloud $59.3bn (+27%) and Azure +43%; management guided Azure to about +45% in the current quarter. The shares rose about 8% the next day. By product line, fiscal 2026:

★ The company has become, more than ever, one engine. Server and cloud is now 39% of revenue and nearly all of the growth; the consumer business — Windows, Xbox, devices — shrank. That is not a problem in itself: the engine is the best one in enterprise computing, and the Office franchise under it is growing 16% on price and Copilot. But it means the whole valuation now rests on a single question, which is whether the enormous spending that powers that engine earns its keep. Part IV.

That table is the whole debate. Microsoft's operating cash flow rose 34% last year — the business is throwing off more cash than ever. Every extra dollar, and more, went into data centres. Cash capital spending quadrupled in three years, and the figure understates it: the fourth quarter's reported capital spending of about $41bn includes finance leases that our cash-flow data ($35.8bn) does not. For calendar 2026 Microsoft has pointed to roughly $175bn of spending, and says it will grow again in fiscal 2027.

The bill arrives through depreciation, and it has only started arriving. Depreciation and amortisation has nearly tripled since fiscal 2023, and most of the $337bn of property now on the balance sheet was bought in the last two years. The fourth-quarter gross margin was 67%, down on the year, and Amy Hood guided the operating margin to decline slightly in fiscal 2027.

⚠️ An accounting change worth knowing about. From the start of fiscal 2027 Microsoft extended the estimated useful life of its data-centre buildings and offices from 15 to 25 years. Hood called the effect on fiscal 2027 operating income "minimal", and servers and network gear are unchanged at two to six years. We take her at her word. But it is the second time in four years that Microsoft has lengthened the life of its infrastructure — servers went from four years to six in 2022 — and both changes move reported profit in the same direction. An owner should notice the direction even when each step is small.

★ In June the gap between the lenses was the question. Now it is the answer. We argued that free cash flow understated Microsoft because most of the capex was growth, not maintenance — and that if it earned a good return, 30 times owner earnings would look cheap in hindsight. The return is showing up: Azure +43%, a backlog up 84%. But the spending grew faster than the return. A business in which capital spending rises 80% so that revenue can rise 18% is investing heavily ahead of demand; that may be wise, and Microsoft's demand signals suggest it is. It is not, yet, a business whose owners are being paid for it in cash.

Two things are true at once. The first is that Microsoft made one of the great investments of the decade: a stake worth tens of billions, a customer committed to hundreds of billions of Azure, and seven years of access to the leading models. The second is that the most-cited number for Microsoft's future growth — the order book — is now heavily dependent on the finances of a single company that has never made a profit, that is spending on computing at a rate unprecedented in private enterprise, and that since April is free to take new work elsewhere.

A backlog is only as good as the customer's ability to pay it. Microsoft's customers are, overwhelmingly, the most creditworthy organisations on earth. One of them is not like the others. Growth excluding OpenAI of 25% is still excellent, and it is the number we would build a valuation on; the rest is an option that could be worth a great deal or have to be renegotiated.

We said in June that gross margins are the first place a moat's erosion shows. The fourth-quarter gross margin of 67% was down on the year — but because of depreciation on new capacity, not because customers are paying less. That is the cost of widening a moat, not the sign of one narrowing. We keep the score at 9 and keep watching the same number.

Integrity: no veto. Capital allocation: this is where we mark it down a point. Nothing Microsoft is doing is reckless — the spending is funded from operations, and the demand appears real. But the scale of the bet has grown faster than its disclosure: the single largest customer is not named in the backlog, the OpenAI economics have changed twice in a year, and the year the capex nearly doubled is the year the dividend grew by the least since 2017 and an accounting estimate was lengthened. None of that is wrong. All of it points the same way, and we would rather notice than not.

★ On 15 September 2026 Microsoft's board declared a quarterly dividend of $0.98, up from $0.91 — an increase of 7.7%. Payable on 10 December to holders of record on 19 November. Our data pull still showed $0.91. The annual rate is $3.92, a yield of 0.79% at $497.93.

It is the same signal we read at Johnson & Johnson yesterday, where the dividend rise slowed to 3.1% while the board kept cash for acquisitions — and the opposite of Rexford, where a slowing dividend preceded bad news. At Microsoft the business is accelerating and the dividend is decelerating, because the company believes it has better uses for the money. That is a legitimate choice. It is also a bet, and a sub-1% yield means nobody should own Microsoft for its income.

So what does 28.8 times assume? That earnings keep compounding above 20% for several years — consensus has fiscal 2028 at $23.48, +36% on fiscal 2026 — and that the capex converts into free cash flow on roughly the timetable Microsoft implies. If both happen, the shares are fairly priced today and cheap in three years. If the capex peak lasts longer, or OpenAI's third of the backlog has to be renegotiated, 29 times earnings for a company whose owners receive 1.8% in cash is a thin cushion, and a 5% Treasury makes it thinner.

★ Applying our own new rule. Microsoft still scores 9 on moat, growth and financial strength. At $497.93 it is above the fair value we can defend, so waiting is allowed — this is not the June situation. But the zone we name is where it becomes fair again, not where it becomes a bargain: about $430. If it gets there, a reader should begin buying rather than wait for less.