MSFT is a high-quality 'Hall of Fame' stock with fair-to-undervalued metrics, but offers less upside than PLTR for new capital allocation.

Palanteer is generating a tiny fraction of the overall revenues that Microsoft is generating, but is already earning a profit margin, depending on the metric you look at, better than Microsoft.

Does that make Palunteer stock a better buying opportunity than Microsoft stock at current market prices? Microsoft generated $332 billion in revenue over the trailing 12-month period.

Palunteer a tiny tiny fraction of that at 6.156 billion.

If we were to zoom in to the most recent 12-month period, Palunteer generated revenue growth that was over three times the rate of revenue growth of Microsoft.

Palunteer is growing its business much more quickly than Microsoft is growing its business and the rate of increase is improving for Palunteer.

So that difference between the growth rates of Palunteer and Microsoft is working in Palunteer's favor.

Although the scale is unarguably significantly different, Palanteer's six billion is about 2% that of Microsoft 331 billion in revenue.

That being said, Palanteer's profit margins in some cases are even better or approaching that of Microsoft even at its much smaller scale.

While Microsoft's operating profit margin has hovered between 40 and 50% while not increasing by all that much despite the company's very massive scale.

Now, don't get me wrong, an operating profit margin of 47% is excellent. It's almost among the best of the best in terms of operating profitability.

So, Microsoft with an operating profit margin in the mid-40s is almost among the best of the best in terms of operating profitability. So, Palanteer hasn't sustained the level of operating profitability that Microsoft has.

It hasn't yet proven that it can do this over a 5year stretch or a 10-year stretch, which is important for investors to consider.

So I mentioned in some metrics Palunteer is already exceeding Microsoft and one of those metrics is the return on invested capital where Palunteer has continued improving on this metric over the previous 5 years whereas Microsoft has been trending downward.

Microsoft is famously investing hundreds of billions of dollars in data centers for artificial intelligence. That's boosting the company's revenue. It's boosting the company's absolute level of profits while reducing the company's returns on invested capital because so much capital is being put into the business.

Its ROIC has dropped from around 33% in 2022 to 26% over the trailing 12-month period. And for Microsoft and Palanteer, they are comfortably above those thresholds. For Microsoft, its ROIC to WACC ratio is nearly 2:1.

So regardless if we look at it individually or compared to the WACC, Palunteer's profitability according to this metric is better than that of Microsoft.

So now let's look at valuation and unsurprisingly Palunteer is trading at a more expensive valuation than Microsoft. I mentioned Palunteer is growing its revenue at roughly three times the rate of Microsoft.

Its profit margins are already exceeding Microsoft. it has bigger upside compared to Microsoft. And so typically you would expect to see a business trading at a premium.

I don't know if it deserves this much of a premium over Microsoft. It's trading at a forward PE of 73 whereas Microsoft is trading at a forward PE of 21. So it's trading at more than 3x the value of Microsoft when measuring on a forward price to earnings basis.

Similarly, I calculated a fair value for Microsoft. As part of this calculation, I computed a weighted average cost of capital which came to 10% for Microsoft. It's a lower risk business.

As you would imagine, it's weighted average cost of capital. The discount rate is lower for a lower risk business at 10%. And as I mentioned earlier, 26% ROIC, a nearly two closer to 2 and a half to one ROIC to WACC ratio.

That said, I calculated a fair value for Microsoft at $440 compared to the current market price of $492. Microsoft stock looks slightly overvalued measuring using this metric. Of course, this is within my margin of safety of 5 to 10% I like to incorporate when making a determination whether a stock is fairly priced, overpriced, or underpriced.

Microsoft is almost in just barely outside of that 10% range there.

So, I would say I would argue Microsoft stock looks fairly valued using a DCF model and I would argue Microsoft stock looks undervalued when looking at the forward PE multiple.

Number one, they're both highquality companies. Microsoft, I would argue, is a Hall of Fame business.

Microsoft has earned a spot in my Hall of Fame rankings. I actually own Palunteer and Microsoft. So rather than picking only one of them, I picked both of them. I own both of them in my portfolio.

But if I had to add to my positions today and I had to pick between which one of the positions I would add to, I would add to my position in Palunteer before I would add to my position in Microsoft.