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Microsoft Corporation

Microsoft is a $282 billion-a-year software and cloud franchise — Office, Azure and Windows — that earns about 46 cents of operating profit on every sales dollar, now down roughly 29% from its 2025 peak as an AI capital wave reshapes its cash.

From under $1 in 1990 to an all-time closing high near $534 in mid-2025, the shares have since round-tripped roughly two years of gains, trading near $385 by July 2026.
$385
Share price
$2.87T
Market cap
$282B
Revenue (FY2025)
-29%
From 2025 peak
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The statements

A $282 billion franchise compounding near 14% a year

FY2020 → FY2025as reported · $
Revenue$281.7B+15%
Gross margin68.8%−0.9pp
Operating margin45.6%+1.0pp
Net income$101.8B+16%
EPS$13.64+16%
Free cash flow$71.6B−3%
Open the full statements →
As-reported income statement and cash flow, FY2020–FY2025.
  • Growth. Revenue climbed from $168B in FY2021 to $281.7B in FY2025 — about 14% a year — with net income reaching $101.8B at a 36% margin. Few companies this large grow this steadily.
  • Margins. Operating margin widened from 41.8% in FY2023 to 45.6% in FY2025; Microsoft keeps roughly 46 cents of every sales dollar as operating profit.
  • The cash line. Operating cash flow rose 15% to $136.2B in FY2025, but free cash flow slipped about 3% to $71.6B as capital spending jumped to $64.6B — the divergence this report examines.
Valuation

A de-rate, not a discount

Capex vs share buybacks ($B)
Buybacks peaked at $32.7B in FY2022 and were cut to $18.4B as capex tripled past them to $64.6B.
  • The finding. In FY2025 operating cash flow rose 15% to $136.2 billion while free cash flow fell about 3% to $71.6 billion as capex reached 47% of operating cash flow (up from 27% in FY2021), the board cut share repurchases from a $32.7 billion FY2022 peak to $18.4 billion in FY2025 while capex tripled from $23.9 billion to $64.6 billion (capex ~3.5x buybacks),
  • and even normalizing capex to ~30% of operating cash flow lifts free cash flow only to ~$95 billion for a ~3.3% yield — so the 29% de-rate from ~40x to 28x trailing earnings removed froth rather than delivering a margin of safety.
  • The other side. This is a deliberate, reversible governance choice, not distress: Microsoft holds about $51B of net cash, generates $136B of operating cash a year, and can restore buybacks once capex crests.
The OpenAI stake

One counterparty doing double duty

With and without OpenAI
MeasureWith OpenAIExcluding OpenAI
Reported vs adjusted EPS (Dec-25 qtr)$5.16 (+60%)$4.14 (+24%)
Commercial RPO growth (Mar-26)+99% ($627B)+26%
Commercial bookings growth (Mar-26)-4%+7%
The same part-owned, loss-making customer flatters earnings and backs the contracted demand.
  • The finding. In the December 2025 quarter investments in OpenAI added $10.0 billion to other income and $1.02 to diluted EPS, lifting reported EPS to $5.16 (+60%) against adjusted EPS of $4.14 (+24%), while in the March 2026 quarter that same OpenAI relationship carried Microsoft's commercial RPO to +99% growth ($627 billion) versus only +26% excluding OpenAI and turned commercial bookings to -4%
  • including OpenAI versus +7% without it — and Microsoft's equity-method loss from OpenAI was about $4.1 billion in the September 2025 quarter alone, nearly the entire $4.7 billion 'Other, net' drag recorded across all of fiscal 2025, even as Microsoft surrendered its right of first refusal to be OpenAI's compute provider as OpenAI's Azure commitment rose by an incremental $250 billion.
  • The other side. This is disclosure hygiene, not concealment: the funding is capped at a disclosed $13B, Microsoft voluntarily publishes an adjusted EPS that excludes OpenAI, and the equity-method losses are immaterial against net income above $100B.
The business

Three segments, overwhelmingly commercial software and cloud

FY2025 revenue by segment ($B)
Productivity and Intelligent Cloud are 81% of revenue and 89% of segment operating profit.
  • Productivity. Office/Microsoft 365, LinkedIn and Dynamics — $120.8B at a 58% operating margin. The widest, most capital-light moat Microsoft owns.
  • Intelligent Cloud. Azure and the server business — $106.3B, the fastest-growing line and the reason capex has more than doubled in two years.
  • More Personal Computing. Windows, search advertising and Xbox — $54.6B, the lowest-margin and slowest-growing of the three.
Moat

A blended 46% margin hides two unlike moats

Operating margin by segment (%)
The moat is widest where capital intensity is lowest, narrowest where the AI build concentrates.
  • Wide and cheap. Productivity earns a 58% margin on switching costs — Microsoft 365 seats still grew 6% and Copilot passed 20 million paid seats, a premium upsold onto a base it already owns.
  • Real but contested. Intelligent Cloud's 42% margin funds the AI build; it is where the moat is thinnest and the capital heaviest.
  • Commodity edge. More Personal Computing, at 26%, rounds out a franchise the blended number flatters.
Rivals

The cloud growth lead no longer belongs to Microsoft

The three-horse cloud race (Mar-2026 quarter)
Cloud platformGrowthScale
Azure (Microsoft)+40% cc#2 platform
AWS (Amazon)+28%~$150B run-rate, largest
Google Cloud+63%~$80B, fastest-growing
Azure grew 40% in constant currency, yet AWS is bigger and Google Cloud grew faster.
  • Strong, not dominant. Azure grew 40% last quarter — genuine number-two scale — but AWS crossed a ~$150B run-rate and Google Cloud grew 63%.
  • Low barriers, by its own admission. The 10-K states plainly that barriers to entry in many of its businesses are low — cloud is a landlord competing on rent.
  • The tailwind lifts everyone. Contracted demand is real, but Google Cloud alone carries a $462B backlog; the AI wave is not Microsoft's alone.
AI capital

Capex runs at three times the depreciation charge

Capex vs depreciation ($B)
A young fleet: the depreciation charge is still climbing toward the pace of spending.
  • Backed by demand. The build rests on a $627B contracted backlog and an AI run-rate near $37B, up 123% — an investment build, not a speculative one.
  • Not yet in the numbers. FY2025 capex of $64.6B ran at nearly three times the $22.0B depreciation charge, so this capital's cost has only partly landed and today's 46% margin flatters the steady state.
  • A generous clock. Microsoft carries servers at up to a six-year life while Amazon shortened its own to five, citing faster AI-hardware aging.
Demand durability

$1.1 trillion of compute promises against ~$20B of revenue

OpenAI's ~$1.1T compute commitments ($B)
Microsoft's $250B Azure line is the third-largest in a stack many times OpenAI's revenue.
  • The concentration. Commercial RPO grew 99% including OpenAI but only 26% without it; strip the one customer and bookings growth turns from -4% to +7%.
  • Years from self-funding. OpenAI is loss-making on roughly $20B of revenue, yet has signed about $1.1T of multi-year compute commitments that depend on continued fundraising.
  • The offset. Management calls the fleet highly fungible and re-tenantable — but it surrendered its right of first refusal to be OpenAI's compute provider.
Margin bridge

Cost waves the reported margin has so far outrun

Microsoft Cloud gross margin (%)
Guided down toward ~64% as AI infrastructure costs land on the income statement.
  • Three waves building. Owned depreciation catching up to capex, finance-lease interest compounding, and a $196.6B off-balance-sheet lease book that doubled in nine months.
  • Consensus models expansion. Revenue is put at ~17% growth through FY2027 while EPS grows faster — but FY2026 EPS is flattered by a one-time OpenAI gain; excluding it, clean growth is closer to the revenue pace.
  • Where it shows. Microsoft Cloud gross margin has stepped from 71% in FY2021 toward a guided 64% — the clearest sign the cost wave is arriving.
Ownership & pay

Index funds on top; insiders own almost none of it

Largest holders and the insider stake
HolderStakeType
Vanguard Group8.9%Index fund
BlackRock7.3%Index fund
All directors & officers0.03%Insiders
Satya Nadella (Chair & CEO)0.01%Insider
A professionally-managed mega-cap — light on founder-style skin in the game.
  • Not a founder-run stock. Directors and officers together hold about 0.03% and the CEO roughly 0.01% — alignment runs through pay, not a large equity stake.
  • Pay is equity-heavy. CEO Satya Nadella's FY2025 package was about $96.5M, roughly 87% stock; the CFO and President each sat near $28–30M.
  • The governance lever. Halving buybacks to fund capex is a board choice — the same decision that holds down today's cash return.
Forward estimates

Consensus still models double-digit growth

Diluted EPS: actual and consensus ($)
EPS growth of +23% then +15% on revenue near $329B and $384B.
  • The estimates. Analysts model revenue of ~$329.5B in FY2026 and ~$384.4B in FY2027 — about 17% growth each year — with EPS rising to $16.82 then $19.36.
  • One caution. The FY2026 figure is flattered by a one-time OpenAI recapitalization gain worth about $1.02 in a single quarter — not operating, not repeatable.
  • The rating book. Of 56 covering analysts, none carries a sell rating and even the lowest price target sits above the current price.
Scenarios

From ~$300 to ~$780 — the return rests on growth

FY2028 illustrative price scenarios (US$)
Prices are earnings × exit multiple, not forecasts; every published target sits above spot.
  • A de-rate, not a discount. The 29% fall moved the trailing multiple from ~40x to 28x and lifted the free-cash-flow yield only from 1.8% to 2.5% — still below a risk-free instrument.
  • Even normalized, not cheap. Normalizing capex to ~30% of operating cash lifts free cash flow to ~$95B for a ~3.3% yield — short of a margin-of-safety bar; the whole return must come from growth.
  • Solvency is not the question. With ~$51B of net cash and $136B of annual operating cash flow against $43B of debt, the risk is the price, not survival.
What to watch

A franchise on temporary sale, or a permanent step-up in capital intensity — the coming quarters decide.

Read the full report →

This distills a study built chapter by chapter — the statements, the moat, the AI capital, the OpenAI loop and the valuation examined in full.

Compiled from the full report · 2026-07-12 · For information, not investment advice.