Good Morning!
A great big tech stock is on sale.
Microsoft dropped another 3.79% late last week, dragging the stock straight back to its March 2026 lows. Year-to-date, the tech giant is down 19.88%.
For a business that has compounded at a 22% annual rate over the past decade, this is the single best buying opportunity we have seen since the fall of 2022.
Let’s break down the real story behind this sell-off and a potential red flag.
The Key Story
It’s Time to Buy Microsoft Stock
Watch here: https://youtu.be/nA4JGV8ipVc
The Valuation Disconnect
Right now, Microsoft is trading at its deepest value in recent history. If you look at historical medians, the market is practically giving away a premium business at a discount.
Forward P/E Ratio: Sitting at 22.55. This is historically low, placing it in the bottom 10% of its 5-year valuation range.
Price to Operating Cash Flow: Trading 36% below its fair value 5 year median multiple.
The 2030 Picture: Analysts project steady double-digit growth through 2030. At today's price, that puts Microsoft at a future P/E of just 11.4.
For dividend growth investors, the entry point is incredibly sweet. The starting dividend yield is hugging the 90th percentile for the last 5 years. You are locking in a dividend that has grown at a 9.72% compound annual rate for a decade, right at its point of maximum historical value.
Why the Growth Story is Far From Over
Despite its massive size, Microsoft's fundamental growth is actually accelerating:
The AI Tailwinds: Microsoft has a hand in the entire AI pie, from enterprise software applications to infrastructure.
Cloud Dominance: Microsoft Azure is seeing a staggering 40% year-over-year growth, heavily fueled by the demand for AI tokens
The "Red Flag" Wall Street is Panicking Over
If everything is so great, why is the stock sliding? It comes down to one metric: Free Cash Flow (FCF).
Over the past 5 years, Microsoft's Free Cash Flow looks flat—growing at just a 5.6% compound annual rate. On the surface, that looks like a massive warning sign for a growth stock.
But here is the trick: Operating Cash Flow grew 121% in that exact same timeframe, surging to over $170 billion.
Why the massive gap? Capital Expenditures. Microsoft spent just under $100 billion over the trailing 12 months building out AI data centers. In 2022, that number was under $23 billion.
Wall Street sees massive CapEx as a drain on near-term cash and unclear ROI. From a first-principles value perspective, this is growth CapEx. Management aggressively reinvesting to fuel growth in cloud, AI model development, and AI inference capacity. It directly fuels their core business.
The Buffett & Munger Perspective
Charlie Munger always taught us to look at a company's ability to deploy capital efficiently. Microsoft isn't throwing money into a black hole. They have a massive competitive advantage in the AI sector:
The Infrastructure Pie: Microsoft Azure is clocking 40% year-over-year growth, entirely fueled by enterprise demand for AI tokens and cloud infrastructure.
The Digital Employee: With massive structural shifts toward agentic AI use in enterprise software (Microsoft 365), Microsoft is positioned to capture the entire knowledge-base pie of the corporate world.
Proven Efficiency: Microsoft boasts a historical Return on Capital Employed (ROCE) of 26.9% and a Return on Invested Capital (ROIC) of 21.6%.
Management has earned the right to make this bet. If you believe their return on these new AI data centers will match their historical track record, you don't run away from this sell-off. You back up the truck.
Dividend News
New Dividend Increases This Week
DAL - Delta Air Lines raises quarterly dividend by 14.7% to $0.215/share
HEI -HEICO raises dividend by 8.3% to $0.13
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📅 Keep Investing. Stay informed.
– Zach
Founder, Dividend Data
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Disclaimer: Dividend Dividend (Dividend Data LLC) is not a professional financial service. All materials released from Dividend Data (Dividend Data LLC) are for educational and entertainment purposes. Dividend Data (Dividend Data LLC) is not a replacement for a professional's opinion. Contributors to the Dividend Data (Dividend Data LLC) might have equities mentioned in the newsletter