Editor’s Note
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It’s Friday. Time to give you a stock pick from our sister newsletter, The Spill, so you can think about it over the weekend and maybe make a move Monday morning. While The Juice helps you be better with money across the board, The Spill focuses on stocks financial pros are researching and judges how good of buys they are. If you’re already sold, you can sign up for The Spill – for free – here. |
Is Microsoft (MSFT) Now an AI Company?
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Investors have become accustomed to strong quarters from Microsoft (MSFT), but Q1 2025’s performance showed how AI is becoming a bigger part of their story. The company reported revenues of $65.6 billion, up 16% year-over-year, beating expectations as search volume by financial pros grew three-fold according to our TrackStar data. The results reflect Microsoft’s early lead in AI as the company drives adoption across its product portfolio. But the question remains – can Microsoft maintain its margin structure as it builds out expensive AI infrastructure? Microsoft’s Business From its founding in 1975 to today’s AI revolution, Microsoft has remained at the forefront of technological transformation. The company delivers cloud computing, software, and AI solutions to consumers and enterprises globally. Their products span productivity tools like Microsoft 365, cloud platforms like Azure, and consumer offerings including Windows, Xbox gaming, and Bing search. |
Continued…
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Microsoft segments its business into the following areas:
Last quarter showcased Microsoft’s AI momentum, with Azure revenue growing 33%, including 12 points of growth from AI services. Their broad portfolio of AI solutions now includes Copilot for Microsoft 365, Azure OpenAI Service, and GitHub Copilot. Copilot adoption has been faster than any other Microsoft 365 suite addition, with nearly 60% of Fortune 500 companies now using the AI assistant. Internal studies show up to a 70% improvement in productivity for specific work tasks among early Microsoft 365 Copilot users. The company continues investing heavily in AI infrastructure while maintaining strong partnerships with companies like NVIDIA for AI chips and OpenAI for large language models. Their recent focus includes expanding datacenter capacity globally and developing custom AI chips like Azure Maia. Financials
Source: Stock Analysis Microsoft’s revenue machine continues to impress, generating $65.6 billion in sales this quarter while maintaining a healthy 44.5% operating margin despite significant AI infrastructure investments. The company’s cash-generating ability stands out, producing $34.2 billion in operating cash flow this quarter – more than Oracle, Palo Alto Networks, Zscaler, and Fortinet combined. Management returned $9.0 billion of this to shareholders through $5.6 billion in dividends and $3.4 billion in share repurchases. The balance sheet remains pristine, with $78.4 billion in cash against $44.9 billion in debt. This conservative approach means Microsoft could theoretically pay off all debt with just two quarters of operating cash flow while still having resources to fund their AI expansion. These metrics demonstrate Microsoft’s unique position: they’re investing heavily in AI infrastructure while generating enough cash to reward shareholders and maintain a rock-solid balance sheet. Valuation
Source: Seeking Alpha Microsoft trades at 31.1x forward earnings and 20.3x forward EV/EBITDA. While not cheap in absolute terms, these multiples appear reasonable given Microsoft’s growth profile, margin structure, and AI leadership position. The company’s 2.4x PEG ratio suggests the market prices in sustainable growth. Current valuation metrics sit below software peers like Palo Alto Networks (PANW) at 63.6x forward P/E and Zscaler (ZS) at 56.7x. On a price-to-cash flow basis, Microsoft is the second cheapest on the board, only a few ticks behind Oracle (ORCL) Growth
Source: Seeking Alpha Microsoft’s 16.4% year-over-year revenue growth matches high-growth player Palo Alto Networks and triples Oracle’s rate – impressive for a company of Microsoft’s size. Their EBITDA growth of 25.6% topped all profitable peers, suggesting AI investments are already paying off. The consistent three-year revenue CAGR of 13.0%, combined with forward growth projections of 14.7%, indicates Microsoft isn’t slowing down despite their scale. And while the free-cash-flow three-year growth rate is just 7.2%, it’s a huge amount of money given Microsoft’s size. Profitability
Source: Seeking Alpha Microsoft’s margin structure reflects their competitive advantages at scale. While their 69.4% gross margin sits below cybersecurity pure-plays, their 44.5% EBIT margin leads the peer group by a wide margin. The company’s efficiency shines through in their net income per employee of $397,000 – nearly six times Oracle’s figure. A 35.6% return on equity and 18.7% return on assets demonstrate Microsoft’s ability to maintain industry-leading profitability while funding ambitious AI initiatives. Our Opinion 9/10 Microsoft presents a compelling case as both a dominant enterprise leader and AI pioneer. Their ability to match high-growth cybersecurity firms while maintaining industry-leading 44.5% EBIT margins demonstrates exceptional execution at scale. Generating $400,000 in net income per employee while heavily investing in AI infrastructure shows management’s skill at balancing growth with profitability. While the stock isn’t cheap at 31.1x forward earnings, Microsoft’s operational excellence, AI leadership, and proven ability to monetize new technologies make them a core holding for long-term investors. |
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