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Welcome to our latest "Deep Dive," a high level, easy to follow stock analysis designed for our Edge+ members who want to properly value a company before putting capital behind it. We do the heavy lifting so you can make more sound investing decisions.
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Today's deep dive target is MSFT, the world's largest software company and a dominant force across cloud computing, productivity software, gaming, and the AI infrastructure buildout reshaping the entire tech sector.
In today's article we will look at the company's performance, recent results, and dive deeper into its valuation to determine whether the stock is a BUY, SELL, or HOLD, based on our opinion alone.
Alright, grab your coffee and let's dive in.
Introduction
Microsoft still gets thought of as the Windows and Office company, but Azure and Microsoft's position in AI are what set the stock's valuation now. Azure provides a significant share of the compute being rented out to train and run AI models, Copilot is priced as a $30 per seat add-on across the Office suite, and the OpenAI partnership gives Microsoft access to frontier AI technology without having to win the foundation model race outright. That bundling is also why customers stay. A company already running Windows, Office, and Azure has real switching costs in every one of those relationships.
Microsoft is spending tens of billions a quarter on data centers, GPUs, and power, and the entire bet depends on Azure growth and Copilot adoption converting that spend into revenue fast enough to justify it. The company still generates enormous Free Cash Flow even after funding that capex, which is a big part of why the stock trades at a premium that makes plenty of value investors uncomfortable.
This deep dive looks at Microsoft's segment performance, Azure's growth against AWS and Google Cloud, what the OpenAI relationship means in dollar terms, Copilot adoption, capital spending trends, and what the current share price already assumes about future growth. The goal is figuring out how much room is left in that premium and what price would give long term investors a margin of safety.
Edge Score
We have been diligently working behind the scenes to develop several stock analysis systems for our members, including The Edge Scoring System.
The system takes tons of data and provides a score for 5 different metrics:
Valuation
Future Growth Projections
Past Performance
Financial Health
Dividend
The system then takes these five metrics and provides an overall rating for the stock, which we refer to as the Edge Score.
Here is our full Edge Score for Microsoft:
See the full Edge Score and analysis on our website
Below, we will further break down each category and share our methodology for scoring for this company.
Company Background
Microsoft is an American technology company headquartered in Redmond, Washington, founded in 1975 by Bill Gates and Paul Allen. It built its early dominance through MS-DOS and Windows, then Office, becoming the default software running on most personal computers and in most businesses worldwide for decades. That dominance came under pressure as computing shifted toward mobile and the internet, and Microsoft struggled to keep pace until Satya Nadella took over as CEO in 2014 and redirected the company around cloud computing, turning Azure and Office 365 into recurring subscription businesses instead of one time licenses.
Microsoft's most recent strategic shift has been AI. The company built a partnership with OpenAI starting in 2019, investing billions in exchange for compute commitments and a share of future profits, and used that relationship to position Azure as a primary platform for training and running large language models. Copilot now runs across Word, Excel, Teams, GitHub, and Windows, turning AI into a new subscription line across nearly the entire product lineup.
Microsoft reports through three segments. Productivity and Business Processes covers Office, LinkedIn, and Dynamics. Intelligent Cloud covers Azure and enterprise services. More Personal Computing covers Windows, Xbox, and Surface. Azure has become the company's primary growth engine, while Office and Windows continue throwing off large, stable cash flow from an enormous installed base. Today Microsoft is one of the largest publicly traded companies in the world, and its challenge going forward is converting its AI investment into growth that justifies the spend.
Source of Revenue
Microsoft generates revenue from three segments, Productivity and Business Processes, Intelligent Cloud, and More Personal Computing, through a mix of per-seat subscriptions, consumption-based cloud pricing, advertising, and hardware sales.
Productivity and Business Processes (~42% of revenue)
Covers Office, Microsoft 365, LinkedIn, and Dynamics 365. Segment revenue was $35.01B last quarter, up about +17% YoY.
Microsoft 365: Sold as per-seat subscriptions bundling Word, Excel, Teams, and Outlook. Copilot is a separate add-on layered on top, priced around $30 per seat.
LinkedIn: Earns through recruiting tools, advertising, premium subscriptions, and Sales Navigator. Tracks hiring activity and engagement rather than seat counts.
Dynamics 365: Enterprise software sold per user against Salesforce and Oracle. Grows as customers migrate off older on-premises versions.
Intelligent Cloud (~42% of revenue)
Covers Azure, server products, and enterprise services. Segment revenue hit $34.68B last quarter, up +30% YoY, now roughly tied with Productivity and Business Processes in size.
Azure: Priced on consumption instead of seats, billed by usage. Growth now comes mostly from AI training and inference demand.
Server Products and Enterprise Services: The legacy, on-premises licensing business. Shrinks every year as workloads move to Azure.
More Personal Computing (~16% of revenue)
Covers Windows, Xbox, Surface, and search advertising. Segment revenue was $13.19B last quarter, down -1% YoY.
Windows and Devices: Licensing fees from PC makers plus Surface hardware sales. The most cyclical line in the company.
Gaming and Search: Xbox earns through hardware, Game Pass, and game sales. Search earns through Bing advertising. Neither drives much growth.
Revenue Model Characteristics
Microsoft 365, LinkedIn, and Dynamics are subscription based, which makes that revenue predictable. Azure is consumption based, so it moves directly with usage, giving more upside in an AI demand cycle but more exposure if that demand slows. Windows and Surface stay the most cyclical, tied to PC market conditions Microsoft doesn't control.
Now that we have a good idea of the company and what it does, let's discuss the fundamentals, valuation, and exactly what we plan to do with the stock:
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Thank you for joining us for this Deep Dive of Microsoft.
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Thank you, and until next time investors!
Mark & Chris
The Stock Investor’s Edge
Disclosure
This deep dive is for educational and informational purposes only. The authors are NOT financial advisors, thus cannot recommend for you to personally to buy or sell any positions. Positions taken on a particular stock are opinions of the authors and only the authors. It is very important that you do your own research and make investments based on your own personal circumstances, preferences, goals and risk tolerance.
