I bought Microsoft this year, with a cost basis of

I bought Microsoft this year, with a cost basis of 385 for the common stock. The biggest reason for buying it was that it was cheap. I also reduced most of my positions in Google and Amazon's common stock a while ago. Why sell? Because I thought they were expensive.

Looking back now in hindsight, I seem to have been wrong 😅, including clearing out SanDisk at over 600, clearing out be at 150, clearing out AMD at 160 last year, and selling Broadcom at 200 after buying at 160.

Perhaps, holding onto good stocks and lying flat is the right thing to do 😐

阿米巴星人

The latest earnings report provides the core input for the valuation model.

Microsoft's FY26 Q3 fundamentals are very strong: revenue of $82.886 billion, up 18% year-over-year; operating profit of $38.398 billion, up 20% YoY; net profit of $31.778 billion, up 23% YoY; diluted EPS of $4.27, up 23% YoY. Azure and other cloud services revenue grew 40% YoY, 39% in constant currency; Microsoft Cloud revenue reached $54.5 billion, up 29% YoY; AI business annual revenue run rate exceeded $37 billion, up 123% YoY.

However, pressure on the cash flow side is also evident: Q3 operating cash flow was $46.679 billion, property and equipment additions were $30.876 billion; capex for the first three quarters was already $80.146 billion, compared to $47.472 billion in the same period last year. In other words, Microsoft's profits are good, but AI data center investments are swallowing a significant portion of its free cash flow.

Therefore, valuation cannot rely solely on PE, but must also consider P/FCF simultaneously.

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2. Current Valuation: PE is no longer expensive, but FCF remains expensive.

Different data sources update at slightly different speeds, so using a range is more reasonable:

Metric Current Approx. Level History/Comparison My Interpretation

TTM PE 25–27x 10-year average/median ~31–33x Significantly below historical median

Forward PE 22–24x Below the average PE of the last 3–5 years Not expensive for a company of Microsoft's quality

PS ~10.2x 10-year median ~10.27x Roughly at historical median

EV/EBITDA ~16–17.5x 10-year median ~19.5x Below historical median

P/FCF ~40–43x 10-year median ~33x Still relatively expensive, core reason is heavy capex

FinanceCharts shows MSFT PE at 26.55x, forward

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4. Valuation Range Using FY2027 EPS

FinanceCharts' forward PE is ~22.08x, corresponding to a current price of ~$424, implying a forward EPS of ~$19.2. StockAnalysis also shows Microsoft's 5-year EPS growth forecast is ~14.58%, indicating the market still views it as a double-digit growth company, not a mature low-growth software company.

Rough estimate using FY2027 EPS = ~$19:

Scenario Assigned PE Corresponding Stock Price

Pessimistic: AI capex continues to be penalized 20x ~$380

Conservative: Maintain current forward PE 22x ~$418

Neutral: Quality premium recovers somewhat 24x ~$456

Moderately Optimistic: Return to reasonable growth stock valuation 26x ~$494

Optimistic: AI narrative re-expands 28x ~$532

Strong Bull: Return near 10-year PE median 32–33x ~$608–$627

Therefore, the current price around $424 roughly reflects: the market is willing to give Microsoft ~22x FY2027 EPS, but is temporarily unwilling to give it a higher premium for AI.