MSFT is S-tier long-term (10 years) for quality/entrenchment, but B-tier short-term for valuation due to uncertain ROI on heavy AI capex.

Well, we got a request to do Microsoft next. So, how about we do that? Um I think even last time we talked a bit about Microsoft. Uh just when we cover the MX7 to me it's like the one Mac 7 company where I feel like I I just don't have a strong opinion like it probably if I would look at Amazon I have a pretty strong opinion if I look at you know Google or Alphabet I have a strong opinion not so much the case for Microsoft

um I don't see it go away and you know if we look at 10ear time horizon um I think that's that's pretty fair but I would be interested what's your opinion because I think you gave let's get it up here I think you just yesterday gave a talk on the community um you know one slide that I found pretty interesting.

Um, let's see if we can pull it up. This one. So, maybe you can just walk us through what you found here and how that changes your view on Microsoft in 10 years time.

Meta, Microsoft, Alphabet, Nvidia, Oracle, Amazon these types of companies u there's $3 trillion uh in offbalance sheet liabilities that have not yet shown up uh on the financial statements of these companies.

So, they're making these massive massive commitments and and Microsoft is not quite um as bad, let's say, as as Alphabet. Um but they're still doing about $175 billion in capex this year.

And really, it becomes a conversation about, you know, fundamentally, what do you think the return on this capital is going to be? Uh, and so these are obviously multi-t trillion dollar companies, but if you went back two years ago, you would have for sure said these are titans of industry that are basically invincible and have fortress balance sheets and of course they will be uh around and very strong for uh decades and decades and decades.

And I'm not arguing uh against that. But at the same time, the magnitude of the bets that they're making.

Um, if a if demand for AI computing power uh basically falls short of what of what they're projecting and they're projecting, you know, exponential increases in demand for for AI compute.

Um, these contractual commitments uh could weigh them down for decades and we may look back and say that, you know, this is basically how these companies destroyed themselves.

Um I for the record I put like let's say there's a 5% probability of that. I think that's uh not anywhere close to what I would say is my is my base case. But the point being uh these companies are are making um uh bets at at a size uh that really they never have before.

Um and you know the consequences of that are are uh yet to be determined.

Um, I'm probably more optimistic uh with Microsoft. Um, you know, I don't like I don't know the business as well as I know Alphabet for example, but I think I agree with the chat. It's probably it's probably S to A tier.

Um, you know, Microsoft Azure, I think that's going to continue to to benefit uh very very well from uh demand for for AI compute. >> I yeah it would be sort of comical to to put it anywhere below that because uh like I said there are legitimate concerns probably more from the valuation perspective today of um when you're buying in at the current price to earnings um how are earnings going to be impacted by all this capex in the future that eventually is going to ripple across the income statement.

Right? If you you take on more debt to finance data centers um that doesn't affect trailing earnings, but you're going to see higher interest payments on uh you know future earnings and that's going to reduce your margins and these kind of things.

Um so I think there's legitimate questions around uh the attractiveness of the valuation today. Um, but just given how diversified and entrenched Microsoft is, uh, on a 10-year horizon, it would be very hard for me to argue that they're they're not S tier.

Um, I think it's just very uncertain. I mean basically we see it here like make depreciation 7 years and the profits pop up. it's so uncertain like how much profits will go down and I mean basically you can calculate parts of it right if you just look at the depreciation schedule but then with the all of the um offbalance sheet debt it's just a huge bet that they're making where it's just like okay do we think it will pay off I'm not quite sure

um as we discussed last week I think most of these companies and that's a good thing are such high quality and almost monopolies in what they do primarily that if it doesn't pay off you have burned a lot of cash but you still are the number one in what you do and you will earn that cash back over the next 2 or 3 years.

So that's why I'm saying 10 year time horizon. I don't think any of these companies will have major problems because again if it doesn't work out it's not like they will get well I just want to say it doesn't like there will be any other company coming up.

We could talk about Parent here which is a company we cover on the show uh next Wednesday. So stay tuned for that because I feel like especially a comp company like Microsoft might get into some problems there eventually.

Um, but I agree. I think S tier longterm, keep it short. Value today, I would put it lower. Um, I don't think it's also S tier. I think it's not expensive at all. Um, but I would probably just go a tier.

Um, I think if I I'm more bullish on the 10-year outlook because I think at that point, I'm very sure the company still exists and it's likely better than today. Um, the more short-term you go, the more I feel like I don't know if that bet will pay off naturally.

>> even B. Okay, I think that's fine. I think >> just because of the just because of I mean I think it's like you know basically trading near the the market multiple um but the percentage of capex as you know share of revenue that they're spending is dramatically more than the median S&P 500 company.

So just fundamentally there's a lot more uncertainty about the valuation because we don't like I said we don't know what the returns on capital are going to be.

So, um I think B might even be charitable, but uh >> I think B is fair as we see here. I mean, I'm just trusting the chat right now. If they tell me 25 times forward PE, I just accept the fact that that's true.

Um but I think that's about where we're trading. And I think if you pay 25 times forward earnings for for Microsoft, um I think that's fair.

>> sorry but but that's next year's earnings, right? So like you know we're talking about the the these off balance sheet obligations, the capex commitments, the interest on the debt that they're raising that's going to affect earnings not so much next year but the following year and the following year and the following year.

So, I would say it's a little bit of a trap if you're really fixated on just what the valuation is based on next year's earnings because you really wanted to be thorough about it.

You would need to model out uh you know the expected uh depreciation and interest costs um which are going to grow significantly.

All right, Salesforce. Um, I think we can do it quick because I kind of look at Salesforce similarly, um, compared to the other SAS companies as I do to Microsoft when I look at the Max 7.

Um, not because quality is as high, just because I feel like it doesn't excite me that much.

I know it's cheaper than Microsoft and Constellation but value today does not only mean we only look at the price. you still have to have the quality and that matters also in 3 to four years time.

I think the quality is lower than than these other companies to the extent where I wouldn't see it you know better positioned even for the next 3 years um than Microsoft or or consolation.

there's so many other companies even I don't know Microsoft you know if AI gives you the opportunity to make products way cheaper than it used to I could see so many stronger companies um sort of expand into fields that Salesforce is now dominating