--- ticker: "MSFT" company: "Microsoft Corporation" date: "2026-10-26" view: "Hold" fair_value: 549.26 price: 529.78 price_source: "last regular-session trade 2026-10-26 16:16:14 UTC (official close 2026-10-23: $524.51, sip-list-exchange-close)" price_time: "2026-10-26T16:16:14Z" price_vs_fair_value: "-3.5%" bear: 298.09 bull: 801.43 exit_price: 774.58 p_price_justified: "over 50%" restated: "2026-10-26" method: "case-spread-2026-10-24" original_fair_value: 549 original_view: "Buy" page: "https://alpha.dming.si/research/2026-10-26-msft-5" --- # MSFT · Microsoft Corporation · Hold Research report as of 2026-10-26, unblinded. Page: https://alpha.dming.si/research/2026-10-26-msft-5 We value MSFT at $549 a share. The report's $529.78 price (Oct 26, 2026) was 4% below fair value: Hold. _Restated Oct 26, 2026 (method case-spread-2026-10-24); the report's original value was $549, Buy._ | Lens | Range | Marks | | --- | --- | --- | | Our report | $298 to $801 | fair $549; original $549 | | Our simulation | $292 to $1,021 | median $532 | | Street targets (29) | $440 to $725 | average $598, median $600 | | Price | | $529.78 | Bands run from our bear to bull (the hollow mark is the original $549), our simulation's 10th to 90th percentile and the Street's low to high. Street targets forecast future prices, not value today. Market data, captured Oct 26, 2026. | Figure | Value | | --- | --- | | Fair value | $549 | | Price | $529.78 (market data, Oct 26, 9:16 AM PT) | | Five-year return | 11.0% (a year, at the report's price) | | Bear / bull | $298 / $801 | | Exit price | $775 (on Jun 30, 2031) | | Confidence | 31% | | Price against our scenarios | The price is justified in over 50% of our scenarios (4,000 simulated outcomes, each drawing the uncertain drivers from ranges we chose: our judgement, not a measured chance) | **What the price needs.** Any one of these, on its own, would justify the price: - Azure growth vs our path, FY2028-32: needs -2.9%, we have 0.0% - Capital needed per dollar of revenue vs our path: needs 4.2%, we have 0.0% - Exit multiple, EV/FCF: needs 32.6, we have 34.8 _This text argues the original call. The current figures are at the top._ **Original call, Oct 26, 2026 (before the Oct 26, 2026 restatement)** ``` MSFT — Microsoft Corporation — research view (market: Buy) As of 2026-10-26 · unblinded: a same-day revision of msft-4 under one long-run-return rule the owner approved for MSFT, GOOGL, AMZN and META (assumptions.md). Model committed before this report (e107a9e). Revises 2026-10-26-msft-4 ($541, Buy), which stays on the record. Fair value today $549 per diluted share (cost of equity 10.08%). Weighting the pessimistic, central and optimistic cases 25/50/25 (our weights) gives $550 Judgment range $489 to $609 on the capital and depreciation judgments (section 1); Buy at or above $529.78, Avoid below $450.31 Price $529.78, last trade 2026-10-26 16:16 UTC (2026-10-23 close $524.51) → fair value 3.7% above: a Buy Five-year exit price $775 on 2031-06-30: the mean of the long fade ($558) and the outside view on free cash flow ($992); at 10/20 years $756/$791 Five-year return 11.0% a year from $529.78 to the central exit, payouts included Bear / bull today $298 / $801, each one consistent business outcome Confidence 31% of our simulated values fall within ±20% of $549 (odds.json; subjective, not calibrated) Moat Wide: Microsoft 365 is the default work suite and Azure a top-two cloud; the open question is the capital each new dollar of revenue needs Market expects A little less than our path: plant per dollar of revenue 4.2% heavier than ours, or Azure growth 2.9 points a year below ours, takes the value to the price Price needs any one of: capital +4.2% every year; Azure growth −2.9 points a year in FY2028-32; an exit at 32.6x EV/FCF against our 34.8x; Agents and Infra margin −1.5 points Odds in our scenarios P(price justified): 50%, the share of simulated scenarios with fair value at or above the price (odds.json; subjective; simulated mean $609) Key driver Plant per dollar of revenue: keeping the FY2028 level for good is −$60; 10% heavier every year is −$46. Depreciation: +$59 at 14.2% of net PP&E instead of 18.3% Street $597 average target, 59 analysts, market data, updated 2026-10-03 (read 2026-10-23, not refreshed; an expectations reference, not validation) ``` **Microsoft is a Buy: fair value $549 against $529.78, 3.7% above the price.** Nothing about the business or the forecast changed since msft-4 ($541) this morning. One input changed: the long-run return on new capital that the long fade uses after FY2031. Our four hyperscaler reports set it four ways; the owner approved one rule for all of them (`valuation.md`, study 2026-10-26-hyperscaler-return-rule). **The rule.** Each case earns, on growth after FY2031, its own year-five return on its net capital: year-five after-tax operating profit over FY2026 net property and intangibles ($331.7B, 10-K) plus the case's FY2027-31 capital spending less depreciation. Growth then needs the same capital per revenue dollar the case reaches in FY2031, 1.1 times revenue. The returns are 27.5%, 32.2% and 32.7% for the pessimistic, central and optimistic cases (output.txt), floored at the 9.92% WACC and capped at Microsoft's median five-year return on the same measure, 144%; neither binds. msft-4 used 15%, 22% and 25%, set by hand below each case's own 2027-31 build return (24-29%), which assumed capital per revenue dollar kept rising after FY2031. Microsoft's history (62-317% over FY2013-25) was earned on 0.1-0.8 times revenue of capital and does not stand in. | Step | Central | Change | | --- | ---: | ---: | | 2026-10-22 report, valued 2026-10-22 | $544.90 | | | Same model, valued 2026-10-26 | $545.48 | +$0.58 | | FY2028 capex held at FY2027's $205B, and the plant per dollar it reaches kept | $543.45 | −$2.03 | | Optimistic case the same at $220B | $543.45 | 0 | | Mature return on new capital at each case's volume-only return (central 22%, optimistic 25%): msft-3 | $481.96 | −$61.49 | | The held FY2028 level glides back onto each case's path by FY2030: msft-4 | $540.98 | +$59.02 | | **Each case's mature return holds its own FY2031 capital per revenue dollar: this report** | **$549.26** | **+$8.28** | (`output.txt`, each step a full rerun.) The capital rule from msft-4 stands: FY2028 capex is held at FY2027's $205B and glides back onto each case's own path by FY2030. Central capex including finance leases: $205B, $205B, $135B, $126B, $186B, $203B for FY2027-32. ## 1. The judgment range, and which rating each choice gives Central fair value from `output.txt`; the rating uses `restate.view()` at $529.78 (Buy at or above $529.78, Avoid below $450.31). | Choice | Central capex FY2027-32 ($B) | Central | Rating | | --- | --- | ---: | --- | | msft-3's floor: the FY2028 plant per dollar kept for good | 205, 205, 171, 190, 210, 230 | $489 | Hold | | No unannounced cut in FY2028 or FY2029, mature return set at 19% | 205, 205, 205, 67, 186, 203 | $536 | Buy | | Gradual normalisation, a reviewer's path (not guidance) | 205, 205, 170, 170, 186, 203 | $542 | Buy, 2.3% above | | No unannounced cut in FY2028 or FY2029 | 205, 205, 205, 67, 186, 203 | $548 | Buy | | **This report: FY2028 held, back on the path by FY2030** | **205, 205, 135, 126, 186, 203** | **$549** | **Buy, 3.7% above** | | FY2028 brought forward: back on the path from FY2029 | 205, 205, 99, 157, 186, 203 | $550 | Buy | | Three-year glide: on the path only in FY2031, the exit year | 205, 205, 147, 147, 159, 203 | $595 | Buy (rejected) | | Depreciation reaches 14.2% of net PP&E (our Alphabet report's rate) instead of 18.3% | 205, 205, 121, 104, 158, 173 | $609 | Buy | Every capital choice we judge defensible gives a Buy, by 1.2-3.8%; only the permanent floor gives a Hold. We reject the three-year glide: it puts the lowest capex in FY2031, the one year the FCF exit capitalises, and so inflates the value by $46. **How thin the Buy is.** Capital 4.2% heavier than our path in every year, Azure growth 2.9 points a year below ours, or an exit at 32.6x free cash flow instead of 34.8x each takes the value to the price (`market.txt`). Wednesday's capex figure and its direction matter more than Azure. ## 2. Forecast and value Central case (`output.txt`): revenue $393.4B in FY2027 and $644.3B in FY2031. Capex including finance leases is 25.8%, 21.6% and 28.8% of revenue in FY2029-31. FY2031 free cash flow on the vendor's basis $209.2B, at 34.8x EV/FCF plus the $110.6B bridge for the outside view. Sensitivities (`output.txt`, each alone): Azure growth ±3 points a year −$20.2 / +$22.5; Agents and Infra margin ±1.5 points −$19.6 / +$19.6; EV/FCF exit 31x / 38x −$34.0 / +$28.7; mature return 15% −$17.0 and 30% −$2.1; capital 10% heavier −$46.1; OpenAI stake halved −$7.2. msft-3's sections 2-5 and 7 still stand as written (`../2026-10-26-msft-3/report.md`): Anthropic's S-1 minimum, FundaAI's preview, the rest of the counter-case, the Q1 FY2027 preview (revenue $92.65B, EPS $4.87 excluding OpenAI, capex about $53B) and the review answers. Where msft-3 or msft-4 states a dollar effect, this report's figures replace it. ## 3. Why the other side could be right For Hold: AI plant may stay heavier per dollar of revenue than any earlier build, because accelerators wear out in six years or less and inference demand keeps rising; then the FY2028 level is the new normal, and the floor's $489 is right. The long-run return could also sit below the case's own: at msft-4's 22% the central is about $541. Our 18.3% depreciation is a computed steady state, not a measured rate; if Microsoft's plant wears out faster still, the Buy goes. For a wider Buy: depreciation at Alphabet's 14.2% gives $609, and Azure growth 3 points a year above our path gives $572. ## 4. Catalysts and falsifiers - **2026-10-28**, Q1 FY2027 results after the close: capex including finance leases against our $53B and any FY2027 or FY2028 direction; Azure against our 46%; the Q2 Azure guide; commercial RPO. - **About 2027-01-27**, Q2 FY2027: the first word on FY2028 capex. - **About 2027-07-28**, Q4 FY2027 and the FY2028 outlook. - **Falsifiers:** FY2029 capex at or above FY2028's with no lift to the revenue outlook (the floor, $489, Hold); capex per dollar of next year's revenue 4.2% above our path every year (the price); Azure growth 2.9 points a year below ours over FY2028-32 (the price); commercial RPO growth excluding OpenAI below 15% for two quarters (toward the pessimistic $298); depreciation staying near 13.5-14% of net PP&E through FY2028 as server lives hold at six years (toward $609). - **Anthropic tripwires** (added by section 6). Microsoft's Anthropic minimum, $44.9B from November 2026 to May 2033, has no true-up and can be cancelled tranche by tranche for undelivered capacity (S-1 p. 171), so a lab under strain shows here as slower RPO, not as a stake loss (Microsoft's stake is not disclosed). None moves the central by itself; each counts toward the RPO falsifier above. - **V2.** Anthropic's IPO prices, or trades for 30 days, below $58.90, the Series H price a common share. - **V3.** Broadcom's notes to Anthropic step from 9% to 13% paid in kind (they do when Anthropic misses revenue conditions; S-1 p. 167), or Amazon's or Google's facility draws stall on missed milestones. - **V4.** Vendor money rises above 25% of the new compute Anthropic signs; about 20% today (`../2026-10-26-googl-5/funding.txt`, our arithmetic from S-1 p. 164-169 and F-64). ## 5. Limits - **Depreciation and exit are not yet one rule across the three companies.** Microsoft's 18.3% steady depreciation and 20-year long life stay its own, against Alphabet's 14.2% and 25 years; Microsoft's exit capitalises free cash flow, Alphabet's and Amazon's operating profit. At Alphabet's rate Microsoft is worth $609. - The long-run return holds FY2031's capital per revenue dollar for good; that is a judgment, the case's own level rather than a rising or a falling one. - The Buy is within 3.7% of the price: a small move in the price or in any one input changes the label. ## 6. Funding the build (msft-4 amendment, unchanged) Added to msft-4 the same day, before the 2026-10-28 print; it changes no fair value, rating or forecast and stands as written. The arithmetic is in `../2026-10-26-googl-5/funding.py` (output `funding.txt` there). **Microsoft still pays for its build out of operating cash flow.** Fact (10-K FY2026 less the 10-Q to March 31, 2026): April-June 2026 operating cash flow $55.4B, additions to property and equipment $35.8B, 65% of it; 66% with $0.9B of finance-lease principal; 74% counting the $5.1B of assets taken on finance leases instead, which is closer to Microsoft's "capex including finance leases". In fiscal 2026 Microsoft issued no debt or stock, repaid $3.0B of debt, bought back $22.3B of stock and paid $26.4B of dividends; cash and short-term investments fell from $94.6B to $76.8B (10-K). There is no gap to fund. **Q3 and the fund's bear reading** (two or more of Microsoft, Alphabet, Amazon and Meta with Q3 capex above operating cash flow, with debt or stock funding the gap). Meta is already there (Q3 capex 103.5% of operating cash flow, 106.5% with finance leases; 10-Q, 2026-10-22). Alphabet, the same evening, and Amazon, the next day, are likely to join it (`funding.txt`). Microsoft is unlikely to: our $53B of capex including finance leases for Q1 FY2027, less a finance-lease share of 13-32% (the shares in FQ4 and FQ1 of fiscal 2026), is $36-46B of cash capex against operating cash flow we infer at $50-60B (FQ1 FY2026 $45.1B, FQ4 $55.4B), 60-92%; and it raised no debt or stock in fiscal 2026. **The numbers that would put Microsoft in**: Q1 FY2027 "Additions to property and equipment" above "Net cash from operations", and a "Proceeds from issuance of debt" or stock line that is not zero. Even on Microsoft's own basis, including non-cash finance leases, $53B sits inside the $50-60B range we infer for operating cash flow; that basis is not the reading's, and the funding test would still fail. ## Revision history | Report | View | Pessimistic | Central | Optimistic | Central change | Price | Blinding | |---|---|---:|---:|---:|---:|---:|---| | 2026-10-15-msft | hold | 249 | 497 | 715 | first | 539.45 | partly unblinded | | 2026-10-22-msft-2 | buy | 357 | 545 | 640 | +48 | 521.08 | unblinded | | 2026-10-26-msft-3 | hold | 292 | 482 | 737 | −63 | 529.26 | unblinded | | 2026-10-26-msft-4 | buy | 292 | 541 | 793 | +59 | 529.78 | unblinded | | 2026-10-26-msft-5 | buy | 298 | 549 | 801 | +8 | 529.78 | unblinded | ## Sources - msft-3's sources (`../2026-10-26-msft-3/report.md`), unchanged: Microsoft's 10-K FY2026, Q4 FY2026 call (2026-07-29), 8-K of 2026-09-02; Anthropic's S-1; FundaAI; market data market data. - The long-run-return rule: `valuation.md` ("Mature return: the case's own capital held") and the study 2026-10-26-hyperscaler-return-rule; Microsoft's 10-K FY2026 balance sheet for net property ($313.1B) and intangible assets ($18.6B). - The shared capital rule: msft-4, `../2026-10-26-googl-5/` and `../2026-10-26-amzn-5/`. - Market quote, 2026-10-26 16:16 UTC. - Section 6: Microsoft's 10-K FY2026 and 10-Qs to 2025-09-30 and 2026-03-31 (SEC EDGAR, pinned in `data-manifest.json`); the other companies' sources listed in `../2026-10-26-googl-5/funding.py`. This work was done with Claude, a model made by Anthropic, whose S-1 msft-3 reads: a conflict of interest.