Pieter Slegers — Should you buy Microsoft after the decline?
The full 15-step deep dive on a $2.91trn business down 25% from its peak — Total Quality Score 7.9/10, two of three valuation screens pass, and the article stops at the score without ever answering its own question.
One-line take: the archive's first full write-up of a Magnificent Seven name — and, notably, one that never states a verdict. Microsoft at $391.8 and a $2.91trn market cap, down 25% from its peak and −17.1% year to date. Three segments: Productivity and Business Processes 42.6%, Intelligent Cloud 39.4%, More Personal Computing 18.0% — plus the fact that matters most for the AI question, "by investing in Microsoft, you are also investing ChatGPT. Microsoft currently owns 27% of OpenAI." Twelve of the fifteen criteria pass cleanly: gross margin 68.6%, ROIC 22.0%, ROE 34.4%, net margin 39.0%, interest coverage 53.2x and a net cash position, ten-year EPS growth 27.2%, Owner's Earnings +28.1% a year over ten. Three do not, and they are the interesting ones. Capital intensity: CAPEX/Sales 27.2% and CAPEX/Operating Cash Flow 51.8% both fail — rescued only by the maintenance-versus-growth split, which on depreciation-as-maintenance gives 2.8% and 5.3%. Stock-based compensation: 10.3% of net income (11.3% on a five-year average), above the house limit. And the reverse DCF, which is left explicitly unresolved: taking $80.6bn of estimated free cash flow, subtracting $12.3bn of SBC and adding back $40.9bn of growth capex gives $109.2bn, and at that base the price requires 12.8% annual FCF growth for a 10% return — "possible but ambitious if you ask me." The multiple screen passes (22.8x forward against a 27.8x ten-year average) and the earnings-growth model gives 11.7% a year. Final Total Quality Score 7.9/10 — and then the article simply ends. No buy, no pass, no entry price.
1. Stocks & names mentioned
One security is analysed. Microsoft is Neutral: the piece completes the full 15-step framework and stops at the score without recommending an action, without naming an entry price, and without adding the name to the portfolio — the same treatment HEICO and Eli Lilly receive elsewhere in this archive, except that those two state their pass explicitly and this one does not. OpenAI is included because the 27% stake is a material part of what a Microsoft shareholder owns. Competitors named in the end-market section (Apple, Amazon, Google Cloud, Alibaba Cloud, IBM) are structural references and are left to the talking points. Research legend: QT Qualtrim · SA Seeking Alpha · STK Stock Analysis. Written post with no timestamps — the At link opens the article.
| Ticker | Name | Research | View | What he said | At |
|---|
| MSFT | Microsoft Corporation | QT · SA · STK · FA | Neutral | Full 15-step deep dive; Total Quality Score 7.9/10; no verdict given. "Microsoft is a global leader with a wide moat. Their competitive advantage is based on high switching costs… Users and businesses find it costly and difficult to move away from its integrated software and services." Segments: Productivity 42.6%, Intelligent Cloud 39.4%, More Personal Computing 18.0%; Windows at a 75% share of personal computing, Azure at 20% of a cloud market growing 16.0% a year to 2033. Economics pass comfortably — 68.6% gross margin, 22.0% ROIC, 34.4% ROE, 39.0% net margin, net cash, 27.2% ten-year EPS growth. Three failures: CAPEX/Sales 27.2% and CAPEX/OCF 51.8% (both pass only after stripping growth capex, giving 2.8% and 5.3%); SBC at 10.3% of net income; and a reverse DCF requiring 12.8% annual FCF growth — "possible but ambitious if you ask me." Valuation: 22.8x forward against a 27.8x ten-year average, with an earnings-growth model return of 11.7% on 12% EPS growth and a multiple assumed to fall to 20.0x. | read ↗ |
| OpenAI | OpenAI (private) | — | Neutral | Private; named as an embedded part of the Microsoft position rather than as a company with a view: "Please note that by investing in Microsoft, you are also investing ChatGPT. Microsoft currently owns 27% of OpenAI." It is also half of the risk on the other side of the ledger — "while Microsoft has made major bets on AI through its OpenAI partnership, the pace of innovation means it risks being disrupted." No valuation, no comment on OpenAI's own economics. | read ↗ |
Stance = how each name is framed in this post. Apple (Windows' main competitor), Amazon, Google Cloud, Alibaba Cloud and IBM (Azure's) and Google (productivity software) appear only as market-share context and get no rows. This is the second Compounding Quality post of 19 March 2026 — the Buy-Hold-Sell List update went out the same day. The 15-step framework itself is on the actionable insights page.
2. Talking points
What you are actually buying
- Three segments, roughly 43 / 39 / 18: Office and Microsoft 365 plus LinkedIn and Dynamics; Azure; and Windows licences, Surface, Xbox and Bing. Half of revenue is American.
- Gates' definition of the goal is quoted as the organising idea: "A platform is when the economic value of everybody that uses it, exceeds the value of the company that creates it."
- And the fact that changes the AI framing: "by investing in Microsoft, you are also investing ChatGPT. Microsoft currently owns 27% of OpenAI."
The moat, stacked five ways
- Primary source is switching costs — "users and businesses find it costly and difficult to move away from its integrated software and services."
- Supported by intellectual property, brand, economies of scale, network effects ("Windows and Office increase in value as more people use it because of compatibility") and, unusually, regulatory compliance as a barrier to entry.
- Positions: Windows at 75% of personal computing, Azure at 20% of cloud in a market growing 16.0% a year to 2033, and market leadership in productivity software.
Management: the incentive detail is the point
- Satya Nadella (CEO since 2014, at Microsoft since 1992) "must own a minimum of 15x his base salary worth of Microsoft stocks" — a mandated stake rather than a granted one.
- Amy Hood as CFO since 2013. Total insider ownership is under 1%, worth $1.1bn — large in dollars, immaterial as control, which is the usual mega-cap problem for an owner-operator framework.
The capital-intensity problem, and the adjustment used to answer it
- Raw numbers fail badly: CAPEX/Sales 27.2% against a 5% limit, CAPEX/Operating Cash Flow 51.8% against 25%.
- The adjustment splits maintenance from growth capex, using depreciation and amortisation as the proxy for maintenance: "as a rule of thumb, we state that the company's maintenance CAPEX is equal to the company's Depreciation & Amortization." On that basis, 2.8% and 5.3%.
- The same investment is also given as the reason ROIC has been falling — "Microsoft is investing heavily in AI… We think this number will go up again over time as these investments will yield a return eventually." Both claims rest on the data centres eventually earning a return, which is the open question in the whole AI-capex debate.
Stock-based compensation is charged, not excused
- 10.3% of net income, and 11.3% on a five-year average, against a preference for under 4% and a limit of 10%. "This is a cost for shareholders like us. We will take this into our valuation models."
- It is then actually deducted in the reverse DCF ($12.3bn), which is the part that matters — the criterion is not just recorded, it changes the number.
The three valuation screens
- Multiple: 22.8x forward against a 27.8x ten-year average — passes.
- Earnings growth model: 12% EPS growth + 0.9% yield, with the multiple assumed to fall from 22.8x to 20.0x over ten years → 11.7% a year. Passes the 10% bar.
- Reverse DCF: $80.6bn expected FCF, minus $12.3bn SBC, plus $40.9bn growth capex added back = a $109.2bn base; the price then requires 12.8% annual growth for a 10% return. Marked as uncertain — "possible but ambitious if you ask me."
- Note the construction: adding growth capex back into free cash flow is what makes the base large enough for 12.8% to look achievable. It is the mirror image of the maintenance-capex adjustment, and both depend on the same assumption.
The record
- Owner's Earnings +19.9% a year over five and +28.1% over ten. Revenue +14.8% / +13.2%, EPS +19.0% / +27.2%.
- Shareholder return: −17.1% year to date, +12.5% a year over five years, +13.6% a year since 2001 — clearing the 12% bar, but only just, and measured from a post-dot-com base.
What the article does not do
- It ends at "Microsoft gets a score of 7.9/10." There is no buy, no pass, no target price and no follow-list statement — unlike the HEICO and Eli Lilly write-ups, which both close with an explicit refusal and a reason.
- Read alongside the same day's Buy-Hold-Sell sheet, the omission is louder: Microsoft is not on the 45-name Buy list, and the archive's standing position is that this is the crowded large-cap corner Compounding Quality deliberately avoids.
3. In plain English
A jargon-free summary of the thesis behind each argued name. (Renders on each name's consolidated page.)
MSFT — Microsoft Corporation Neutral
Microsoft sells three things: the Office software and subscriptions most companies run on (43% of revenue), the Azure cloud computing that other businesses rent instead of owning servers (39%), and Windows licences plus Surface, Xbox and Bing (18%). It also owns 27% of OpenAI, so buying the shares is partly buying ChatGPT.
On almost every quality measure it passes easily — 69% gross margins, 22% returns on the capital it employs, net cash rather than debt, and earnings that grew 27% a year over the past decade. The shares are down 25% from their high and trade at about 23 times next year's earnings against a ten-year average of 28, so on that measure they are cheaper than usual.
Three things do not pass. Capital spending has exploded to 27% of sales because of AI data centres — defensible only if you treat that spending as investment for growth rather than the cost of staying in business, which the analysis does. Stock awards to staff cost shareholders about 10% of profit each year. And working backwards from today's price, the shares already require Microsoft's cash flow to grow 12.8% a year for a decade to deliver a 10% return — described as "possible but ambitious."
The article scores it 7.9 out of 10 and then simply stops. No decision is stated, no price is named at which it would become interesting, and it does not appear on the same day's list of 45 buys. In the archive's own terms that is a pass by omission rather than by argument.
Summary derived from the archived Compounding Quality post (text in transcript.txt) for personal study. Not investment advice. © Compounding Quality / Pieter Slegers for source material.