MSFT is stronger than ever — Azure up 40%+ with unmet demand, Copilot at 30M seats — but it must now turn huge AI capex into software-like profits. Expected 10-year returns average ~12.9% (4% low, 21.5% high) at $533, and a 15% required return implies an average buy price of $450.

Microsoft's stock has risen dramatically, exceeding 30% in just two and a half months. The pleasant surprise here is that this rise was not a result of media hype, but rather because Microsoft's huge investment in artificial intelligence is already paying off.

Its cloud computing business has exceeded $100 billion annually, and demand is so strong that the company is unable to meet this growing demand. With the earnings announcement date approaching, let's delve into the details before the announcement.

The last time we talked about Microsoft on July 21, the stock price was around $398. Today, it has reached about $525, an increase of 32% in just two months.

What triggered this surge? Simply put, profits. On July 29, Microsoft announced a record quarter, generating $90 billion in revenue. This means an 18% increase and profits that far exceeded Wall Street expectations.

The very next day, the stock price rose by 15% in a single session. Guys, this is a trillion-dollar company that achieved 18% year-over-year revenue growth , and its stock saw a 15% jump in one day.

But the real story wasn't just about the numbers, it was about what they proved.

For a long time, investors had one concern: Microsoft was spending huge sums on artificial intelligence, but where was the return? After this report, this concern was turned upside down.

Suddenly, the question became: " Wait, cloud computing is accelerating. AI customers are everywhere, and the backlog of orders is enormous." Over the next few weeks, Microsoft revealed more, completely reorganized its business, and launched an entirely new artificial intelligence product .

Confidence has returned strongly, and so has the stock price .

Looking at the bigger picture, the whole year was full of achievements. Microsoft generated $331 billion in revenue, an increase of 18%, and its cash flow from its operations jumped to nearly $183 billion.

It is a huge and successful company, thriving despite all the controversy surrounding artificial intelligence.

Now, let's talk about Azure, Microsoft's cloud computing service , which simply means renting out huge amounts of computing power to other companies. For the first time, Microsoft revealed its true size.

Azure generated revenues of approximately $102 billion last year, compared to $73 billion the year before.

Guys, this isn't a small startup, it's a $100 billion giant that's still growing by more than 40% annually.

Here's the point that should grab every investor's attention : Microsoft says that demand for Azure is so strong that it exceeds the company's capacity, meaning it cannot build data centers quickly enough to meet the needs of everyone who wants it.

Even after opening 88 new data centers in one year, they are all still fully booked. Instead of expecting growth to slow after this year of achievements, management expects it to accelerate to 45% in the next quarter.

In fact, every new power unit that was put into operation began to generate an immediate profit. Azure alone generated approximately $29 billion in the last quarter alone.

Now comes the turn of Copilot, Microsoft's AI-powered smart assistant , built into Word, Excel, Teams and other programs.

For a time, the biggest concern was : " Sure, companies will try Copilot, but will they really pay for it for all their employees?" Well , now we have a real answer. Microsoft has surpassed 30 million paid seats in Copilot, and the number of new subscribers has doubled in one quarter.

These are not just small experiments; rather, huge institutions are generalizing its use to everyone. The National Health Service in England activated the service for more than 500,000 workers, the accounting firm Ernst & Young for more than 400,000 people, the giant accounting firm KPMG for more than 276,000 people, and HSBC bank for another 200,000.

In the field of programming, GitHub Copilot now has 50 million users, and its revenue there jumped by more than 60% in one quarter.

The number of large clients with more than 50,000 seats has increased sevenfold, and the company has already signed up nearly 40 million AI agents to work for them. Therefore, companies are clearly seeing Microsoft move from the trial phase to the phase of making the service available to everyone.

Guys, does what I told you sound like a giant corporation? These are the same figures you hear from startups. This is unbelievable for a company of this size.

And I would like to remind everyone, this is the company that a tech CEO told me 14 years ago, when I was investing in it, would end and wouldn't last long.

But here's the really clever part: how does Microsoft make money from this? The old way was simple: you paid a monthly fee for each employee. The new method adds a second layer: payment for each employee in addition to payment for the actual use of artificial intelligence.

Think about what that means. Microsoft can now charge for the employee, for the AI assistant that helps him, and for the computing power that the AI consumes . This means three potential sources of income instead of just one.

In fact, it combined all of this into a new premium package called E7, and hundreds of companies bought millions of licenses within just two months of its launch.

Launching the service. For a company that relies on fixed subscriptions, this new usage model is an entirely new growth engine . Now, let's look at the big picture; this is a truly ingenious move by Microsoft.

In September, the company unveiled a completely redesigned Copilot that not only answers questions but can also write programs and continue working on tasks automatically in the background.

The goal is not to build another chatbot, but to make Copilot the control center for all your business, where Word, Excel, Teams and your own company data are coordinated in one place.

Microsoft's huge advantage lies in the fact that it already owns the software that the entire business world uses on a daily basis.

So, instead of switching between five different apps, you just tell Copilot what you need, and it will handle the rest across them all.

This is what Microsoft is striving for: to become the main gateway for all your business. The reason they want to do this is to reduce the likelihood of you changing the service.

There's another smart transformation as well. Microsoft was closely associated with OpenAI, the maker of ChatGPT. Now, that relationship is less rigid , and Microsoft offers more than 11,000 different AI models from various companies on its cloud platform.

In fact, it is working on developing its own models and computer chips to reduce costs.

Reports indicate that these in-house manufactured chips provide approximately 30% more power per dollar. Running its own models has reduced the cost of some AI tasks by more than 80%.

Why is it so important ? Because Microsoft no longer has to bet on a single AI company winning. Her new bet is much smarter . We win regardless of which AI model tops the list, because they all work on our platform.

This is a more sustainable position than betting everything on one horse.

What is the evidence for all this demand? Microsoft already has a backlog of orders. Are you ready? $680 billion in future business signed and pending.

Here's an important detail: Even if we completely ignore OpenAI , these backlogs have grown by 25%, and nearly 90% of Microsoft's cloud funding comes from traditional businesses , not AI. Laboratories.

This is true. It is a widespread demand. So, let's clearly present the positive scenarios. For business purposes only. The first positive scenario: Demand for Azure is simply exceptional, growing by 40% and the product is still not available.

The second positive scenario: Copilot expands rapidly, and the new prices could add new profits to everything Microsoft is already making.

The third positive scenario: Microsoft dominates the entire competitive landscape. Office, Teams, Windows, and GitHub. It is already on almost every computer in the world, and it wins regardless of which AI system wins.

Its chips and proprietary models also contribute to continuously reducing costs. This is a very strong position. Now, with everything I've mentioned, it seems hard to believe there are negative scenarios.

But guys, you have to remember, there are always negative scenarios, and pessimists have very real fears.

Smart investors at least need to acknowledge it or take it seriously. The first negative scenario. This is the biggest ever. The spending is astounding. Microsoft spent $41 billion in one quarter on developing artificial intelligence, and expects to spend more. More than $50 billion in the next quarter.

This is such a huge amount that free cash flow, which is the amount left over after all this spending, actually decreased last year despite increased sales and profits.

The remaining cash has decreased to $67 billion from approximately $72 billion the previous year. This is very rare for a company like this. The second pessimistic scenario: This spending weakens the company's strength.

Microsoft Cloud used to keep about 69 cents of profit on every dollar. The percentage has now dropped to 65%. This may not seem like much, but it's a significant decrease. It is committed to approximately $330 billion in future data center deals .

Therefore, the most important question to ask about this stock is simple: Will all these hundreds of billions generate the desired profits? The huge profits that Microsoft is famous for, such as software profits ?

Microsoft is not in danger. It has one of the best balance sheets in the world. But artificial intelligence is turning a software company that needed little money into one that needs a lot of money to grow.

This is a very pressing question for all companies. The artificial intelligence companies we're discussing here, folks. In the third scenario, the competition is extremely fierce.

There are Google, Amazon, and others who are fiercely competing in an entirely new sector , a sector open to everyone.

Microsoft lost its monopoly on the OpenAI platform, and some of its older business segments , such as Xbox and Windows , began to shrink.

Even its Dynamics business software is experiencing a slowdown in demand. In a race of this size and speed, even a giant might fall behind . So, the situation is not entirely rosy.

So what does the administration expect for the future? This part is truly impressive. Microsoft expects double-digit growth in both revenue and profits over the next year, with a significant increase in its spending on artificial intelligence.

Typically, when a company spends this much, it warns investors that profits will be negatively affected. But Microsoft says the exact opposite.

She says: " We will dramatically increase our investments in artificial intelligence , and we will achieve double-digit profit growth , with very little impact on profit margins."

If they actually manage to achieve that , it will be absolutely amazing. This will mean that spending on artificial intelligence will pay for itself very quickly .

But guys, that's a slim chance. However, that is exactly what they are promising . Specifically, they expect profit margins to decrease by less than one percentage point, free cash flow to remain positive, and their cloud office business growth to accelerate thanks to Copilot.

This leads us to the next important moment. Microsoft will announce its earnings on October 28.

Now, folks, I have to confess, I'm going to mention this here. I am a huge fan of Bill Gates. I know this will surprise many people. It is actually his birthday. Therefore, they will announce their profits on his birthday .

Let's all congratulate Bill Gates on his birthday on October 28, regardless of our opinion of him.

Wall Street expects revenues of approximately $90.7 billion and earnings per share of around $4.72. This means revenue growth of approximately 17% . Profit growth of 14% is exactly in line with Microsoft's own expectations.

But honestly, the headline numbers are less important than four key things I want you to keep a close eye on. First, and most importantly of all, the growth of Azure. Management promised growth of up to 45%.

If this growth is achieved or exceeded, the demand for artificial intelligence will remain extremely strong. But any major failure here will have a significant negative impact on profits .

Second, Copilot. Will the 30 million paid seats continue to rise to 40, 50 or even 60 million? Or will growth stop after the initial users?

Third, spending and profit margins. More than $50 billion in one quarter is a huge amount. Therefore , keep a close eye on whether these profit margins will actually hold up. Fourth, production capacity.

Is the demand still greater than what Microsoft can build? If all seats are completely sold out due to overwhelming demand, that's excellent. But if the administration says that demand has started to decline, that is the real warning sign.

These four things will tell you almost everything you need to know. Regarding the continued demand for their products and services. Can this growth continue? So, here's the basic tension in this stock, and it's an interesting tension .

It can be said that Microsoft has never been stronger as a company . Azure's boom, Copilot's expansion, and unparalleled control over the business world.

But at the same time, shareholders are now counting on Microsoft to turn one of the biggest waves of spending in corporate history into those legendary, highly profitable software returns.

So, let's analyze the numbers and see what we think Microsoft might be worth. Okay, guys. When it comes to Microsoft or any stock, the company's price is its market value. It is not just a symbol.

Market capitalization is the number of outstanding shares multiplied by the share price. This is approximately equal to 4 trillion dollars.

Then we move on to the value of their organization, $4.18 trillion. This $200 billion difference is essentially their debt. Guys, when you generate $67 billion in free cash flow, you can easily afford $200 billion in debt. Debts. So, we have a good balance sheet.

We have achieved good returns on capital. The return on capital for five years is about 20%, and for one year it is 16.25%, and they pay a symbolic dividend of 0.7%.

But there is one point I want you to focus on here. Here is their profit margin over the past ten years. It has been 34.3% annually over the past ten years, 37% over the past five years, and 40% last year.

Their profits are constantly increasing. This means that their revenues are growing at a faster rate than their expenses. This is a great sign for a great company, and it will have a big impact soon.

Free cash flow has decreased significantly, but if we look at this, we find that free cash flow is $67 billion with net income of $133 billion . Well, they are spending a lot of money on these capital expenditures, which negatively impacts free cash flow today, but does not affect net income for years to come.

This is why we see a price-to-earnings ratio of 30, while... the share price-to-free cash flow is 60 because net income is double the free cash flow. Okay, let's move on to the eight pillars here.

We now have several checkmarks and two X's. The two X's are the five-year price-to-earnings ratio and the five-year stock-to-free cash flow ratio.

But remember, just because they are both high in the X sign doesn't mean the stock is overpriced. If they can actually increase their profits by 20 to 30% annually for a long period of time, the stock could be cheap.

Most importantly, we have all the other checkmarks here: high returns on capital, and low debt. The stocks are essentially the same , but cash flow, net income and revenue growth have all increased over the past five years.

But as you can see, net income rose by 72.5 billion , while cash flow rose by only 11 billion because they are spending so much on capital expenditures.

They are forecasting a profit of $1,970 for next year, growing to $45 over the next four years . Guys, that's more than double in four years. This represents a 20% annual profit growth. This is tremendous growth!

As for revenues, they are expected to reach $870 billion over the next four years, an increase of more than 20% annually. So, let's use a stock analysis tool, and we'll focus on it to see if Microsoft is worth our attention.

In our analysis of the next ten years, we ask: What is the expected revenue growth rate for Microsoft over the next ten years ? Initially, we set 7, 10 and 13 years, and I will change it slightly to 7, 13 and 19 years.

Next, what is the expected profit margin over the next ten years? Remember that we have profits and free cash flow. Free cash flow is currently affected, but that's okay . It is not a company that constantly suffers from this problem.

I believe, and indeed hope, that these free cash flow figures will stabilize over the next ten years.

So, I entered 34, 37, and 40. Yes, it's much lower than last year based on assumptions, but I expect, let's assume, that they will encounter some obstacles along the way. I cannot guarantee them a continuous rise from now on .

Next , what is the price-to-earnings ratio and free cash flow rate that I would assign to Microsoft at the end of my analysis, not today, not after 5 years , not as an average over the next 10 years, but at the end of 10 years.

Well, folks, the average company in the S&P index sells for the long term, at 15, 16, or 17 times earnings and free cash flow. Is Microsoft better than that? A medium-sized company?

I think so. This is very personal, but I have entered 19, 23 and 27 times the profits.

Let's press the analyze button. The stock price is currently 533. I have a lower price of 350, a higher price of 1350, and an average price of 700. Based on today's price, if I buy the stock and my average expectations are met, I expect a return of approximately 12.9%.

Remember that this includes dividends. Based on my lowest expectations, I expect a return of approximately 4% . Based on my highest expectations, I anticipate a return of 21.5%.

Before I get into my returns, I want you to remember the beginning of this year. The prevailing view was that software was finished, and that artificial intelligence would wipe out companies like Microsoft.

The headlines were frightening, and many sold their shares. But many members of our community did the exact opposite. They bought Microsoft shares while everyone else was running away. Today , they have made enormous profits .

What is the value of Microsoft ? They had a stock analyst. They made their own assumptions, just as I have now , and got a price. So, when the stock fell below that price, they went back, re-checked their figures, and didn't have to guess.

They didn't have to listen to the headlines. They didn't have to listen to any tech company CEO telling them that Microsoft was finished. They had a number.

Now, be honest with yourself. If Microsoft's stock falls after the earnings announcement on October 28, what will you do? Are you going to sell because it looks scary ? Will it only concern you with the story?

Are you going to buy it because someone on TV or on YouTube said so too? Or will you determine its value based on your own assumptions ?

Analyze Microsoft's stock yourself. Okay guys, let's see the value of Microsoft based on my personal return of 15%. But currently, based on this return, I need to buy it at a low price of 236 , a high price of 870, or an average price of 450.

As you can see, when it was priced at 398 a few months ago, it was within the buying range, but I hesitated to buy it.

So, friends, if you own Microsoft shares, here's one last question: Do you think Microsoft is really the best Mag 7 index stock to invest in over the next 10 years? I'm not sure.