$MSFT · Dividend Data · 2026-10-29

Microsoft just reported earnings and the results were very impressive. The stock is up 3% after hours. As many of you know, this is the largest position in my dividend growth stock portfolio, which I update every single month on this channel.

And I have been buying a ton of Microsoft stock in the early part of 2026, and that has started to pay off. More than half of my total cost basis was added this year, and right now I have a total return of 59.55%.

I was buying a lot in that February to May period.

Now, here's the thing. Even after rallying recently and this post earnings bump, Microsoft stock is still looking pretty attractive. And at a minimum, I think it's around fair value.

It's up 12.28% year to date. But over the past year, it's down 1.95%, although the stock should hit its all-time high today if this pre-market ends up being accurate. And over the past 10 years, Microsoft stock has been a great compounder in the market.

In that time, it has a total return of 897%. That's a 25.89% compound annual growth rate.

So today I'm going to do a deep dive into the latest earnings report for Microsoft stock and I'll explain why this company is going to continue growing for many, many years to come.

The interesting thing is that they just changed how they reported their segments and the specific products that they actually mention their revenue amounts like Microsoft Azure.

They're finally going to be reporting that every single quarter. And this is a big deal because it's the largest part of Microsoft's business now.

So, I'll be diving into that because you guys know that one of my favorite things when investing is when a company's largest business segment is their fastest growing business segment.

And that's what's happening right now at Microsoft.

But first, they completely restructured how they report their business segments. They now have two main segments, agents and infrastructure, and then devices and consumer. Now, I'll give you a little hint hint.

They put everything that has the potential to grow in agents and infrastructure. And they put all these slow growing and kind of declining assets into devices and consumer.

And you can see that right here. Agents and infra, that's 83% of their revenue. That whole segment grew 3% quarter over quarter, 24.5% year-over-year, $76.8 billion of revenue.

Devices and the consumer, 15.48 billion of revenue grew 0.3% quarter-over-arter, down 3.2% year-over-year.

Let's start with the latest quarter. 92.28 billion of total revenue in the quarter. That's up 18.08% year-over-year. The largest part is Microsoft Azure at 35.9% of overall revenue.

Now, that was 33.17 billion. It grew 12.7% quarterover-arter. And it's growing as a business 48.2% year-over-year. And this is Microsoft's equivalent of Amazon Web Services.

The second largest part of Microsoft is the Microsoft 365 cloud. That's 30.1% of revenue, 27.78 billion in this quarter, grew 4% quarter-over-art, and it's up 17.2% 2% your re year.

This is the consumer and enterprise, you know, Microsoft Office suite, Excel, Word, Outlook, Teams, all of that. But it also includes their AI products like Microsoft Copilot, which I'll be honest, I do not actually use as someone who's a heavy AI user, but is getting deployed significantly in enterprises.

And there is a ton of potential to roll out and gain some of that market share over time.

And Microsoft's been doing a pretty good job at being a fast follower in AI. They're basically just copying every single thing that works that all the other companies are doing and they're rolling that into co-pilot.

It's having pretty rapid product improvement. So, I do feel pretty confident that they'll be able to make that into a pretty good business when we look back, you know, 5 years from now.

Lots of developments going on with the AI application side of Microsoft. I think they have a ton of potential in the enterprise. And I think the next thing they're going to fast follow on is the whole idea of agents.

I think they're going to be making a Grockbot style clone. At least that's what I would do if I was them.

Now, I know they have tons of agent platforms already on Azure, and of course, they host all of the infrastructure for agents and all AI applications, but I think we're really just scratching the surface of that, and I could do an hour just on the AI strategy related to Microsoft.

The third largest business segment is productivity and server licensing. That's 9.1% of the revenue, $ 8.41 billion in the latest quarter. This is more of a legacy business. It's down 23% quarter-over-arter and 3% over the past year.

Next up, you have their search and advertising business. This is predominantly in Bing, $6.55 billion. Very small compared to something like Google, of course, but it's a pretty nice business segment, and I'm sure they have other forms of advertising that are wrapped into it.

It's up 1.8% quarter-over-arter, 10.3% year-over-year.

You have Xbox at 5.38 billion, 5.8% of their overall revenue for the quarter. And in hindsight, their acquisition of Activision Blizzard was a huge mistake. You would have rather just had that capital available of a stronger balance sheet, especially as you had this upcoming AI revolution that was very capital intensive.

So, Xbox, it exists. It's not really growing though. It's up 7.9% quarter-over-arter, but it's down 2.3% year-over-year.

You got industry solutions at 5.8%. You got Windows OEM and devices at 3.8%. That one's been declining significantly in recent years. And then you have Frontier and Support Services at 2.3%.

Now, here's the thing. Most of this stuff I don't even really factor into my Microsoft analysis. It's a rounding error. The whole game is Microsoft Azure and Microsoft 365 Cloud. That's the whole game.

Now, here you can see how the revenue by product category has evolved over time. Overall, the revenue is up 40.7% over the past 2 years. And if we look at Microsoft Azure and Microsoft 365 cloud in that time revenue growth is up 69.11% that's a 30% compound annual growth rate.

Quarterly revenue is $60.9 billion and $217 billion over the trailing 12 months.

And of these businesses Microsoft Azure is the fastest growing $33.17 billion. It's up 107% over the past 2 years. That's a 43% compound annual growth rate. And that growth rate is accelerating.

And here you can see Microsoft Azure's growth rate and it's the fastest it's been in recent years. It's continued going up and up and up. And the interesting thing is that it's accelerating from its largest base of revenue.

In just 2 years, the quarterly revenue of Microsoft Azure has more than doubled from $16 billion to $33 billion.

If we look at Microsoft 365 cloud, this hasn't grown as fast. In the past 2 years, it's up 38.77% in revenue. It's a 17.81% keer. But keep in mind, a lot of this is reliable subscription revenue.

That's pretty high margin because it's software. I do think it'll prove to be pretty durable as well with AI because it's a lot of lowcost products extremely built into the workflow and the whole bundling mechanism of Microsoft 365.

You get a ton of value at a pretty low cost. It doesn't really make sense to vibe code a lot of these things. And then you also have communication platforms like Teams which are proven to be pretty valuable and durable.

Slack for Salesforce has proven to be a pretty durable thing even in the AI revolution. Of course, among the real early adopters and AI power users, they're not using Microsoft Copilot.

They're using codeex and chatbt or they're using clawed code and claude from anthropic. But Microsoft has very deep enterprise relationships. They have a lot of existing contracts and they do report large increases in co-pilot usage and that makes sense because they're making the product significantly better.

They have their equivalent of clawed code. They have their equivalent of cloud co-work. They have managed agents within the platform. They already have a bunch of people's work data related to things because they use the Microsoft 365 suite.

Makes it very easy to integrate. They have the best-in-class security practices because they're an enterprise focused company. And in the long run, if you can be one of the large enterprise AI players, I think that's going to be a massively growing pie.

And I think you only have to capture a slice of it for Microsoft to continue growing that side of the business.

So overall with how they report their segments now agents and infrastructure that's the largest part of the business and I think it's also telling that they're calling it agents.

I think agents the idea of digital employees and the ability to do more and more knowledge work. It's already starting with coding tasks that's going to continue expanding throughout enterprises in every single department.

And in general we're still so early in AI adoption. We're scratching the surface of what this segment is going to be. And I think the name choice is very telling.

And if we look at the operating income by segment, agents and infrastructure, it's the biggest part of Microsoft. Of the $45.92 billion of operating income in the quarter, which is up 21% year-over-year.

40.5 of that agents infrastructure, 5.36 is devices and consumer. So the largest part of Microsoft's operating income is growing 24% year-over-year.

And the growth of Microsoft's stock price over the long run has been powered by the growth of their fundamentals. Here you can see the long-term growth of the revenue of Microsoft.

It's $346 billion over the trailing 12 months, up 17.9% year-over-year. And it's continued compounding, especially over the past decade. They accelerate a lot with cloud and also with moving to the cloud subscription business for Microsoft 365.

Here you can see Microsoft's margins. Gross margins have been going down slightly. That makes sense as cloud and infrastructure becomes a larger part of the business. But operating margins actually went up recently, hit 49.8% in this quarter and 39.7% net margins, although that's gap accounting and I don't think it's the best measure of the business.

I always like to look towards cash flow. In this case, we'll take a look at free cash flow and operating cash flow. And of course, we'll also talk about capex because all of these are related and it's a big part of investing in Microsoft.

What used to be a capital light software company back in the day, it's now becoming a heavy infrastructure company thanks to data centers and the whole AI buildout is a huge capex suck.

But as we dive into the free cash flow, you'll think this is pretty interesting, especially if you just watched my Google video or if you just have been following the industry in general.

Google, Meta, and Amazon, who are all building out tons of AI data centers, they've all gone negative in free cash flow. Microsoft in this quarter they reported positive $18.63 billion dollars of free cash flow and they are not really planning to go negative in free cash flow.

They're not going to go all in like that. Now you could think of that as a positive or you could even think of it as a negative if you're super AI bull and you think that you're going to get great return on investment.

So over the trailing 12 months Microsoft's free cash flow it's not growing but it's 59.96 billion. It's down 23% year-over-year. But just for context I'll bring up Google here.

Here you can see how much their free cash flows dropped. $19.75 billion over the trailing 12 months and they now have two negative quarters in a row billion in the latest quarter.

Microsoft is just simply not doing that. And I suspect in the long run they will be a free cash flow compounder because they are still ramping up their spending a ton.

$39.37 billion of capex in the latest quarter. Just 2 years ago that was $14.92 billion. over the trailing 12 months, $135 billion of capex. And they gave a range of guidance earlier, but they actually are coming in on the lower side.

They're expecting $170 billion over the next year. And that's not because they're getting less bullish on building out the AI data centers. It's just the reality that these are huge projects and they had some pieces get delayed along the way.

So you see this huge ramp up in capex. And frankly, when you see that, it's surprising that their free cash flow isn't declining more. But the reality is is their operating cash flow has been rapidly growing.

This business is making more money than ever over the trailing 12 months. 195.8 billion of operating cash flow up 33% year-over-year. And you can see it's at an all-time high. In the latest quarter, 58 billion of operating cash flow, up 28.73% year-over-year. The highest quarter for Microsoft ever.

And the Microsoft balance sheet still very strong. They have $64 billion of cash and short-term investments. And this is why I mentioned earlier, you wish you didn't do that Activision Blizzard acquisition that was like $70 billion.

In hindsight, you really wish you didn't do that. But Microsoft, similar to Google, they were one of those companies that was just making so much money over time. They had a cash flow machine and they didn't have clear ways to reinvest it.

So, they just had a great balance sheet. Ultimately, they found cloud infrastructure to be a pretty good opportunity. Google went into it with Google Cloud, Microsoft, Microsoft Azure. that they went into a little earlier following AWS's lead.

But before this AI buildout, there wasn't as much opportunity to reinvest all of it in cloud. But now all these big tech companies, they are going heavy into the opportunity.

Microsoft still has negative net debt, negative $29 billion. So they have far more cash than they have debt. They've slowed down on share repurchases in recent years, but they are still slightly repurchasing shares, a couple billion dollars, which is crazy to say it's small.

And Microsoft still pays a dividend and they've been paying their dividend for a very long time. They've got 20 plus years of annual dividend increases. In fact, they just had a new dividend raise of 7.69%.

This gives them a forward-looking dividend yield of 0.74%. And you could say this is part of the reason maybe why Microsoft doesn't want to go free cash flow negative. They feel committed to paying the dividend.

They want to raise it over time. And this has always been a low payout ratio, too. So, it's a very sustainable payment. If we look at it based on earnings per share, so this was gap earnings per share.

Trailing 12 months, payout ratio is 19%. Based on free cash flow even, which I showed you their free cash flow is going down over the trailing 12 months, it's 45.1%. And on a forward-looking basis, it's 48.6%.

So, as I mentioned, they just reported earnings. Let's talk about earnings per share. Adjusted earnings per share over the trailing 12 months is $184. It's up 24.67% year-over-year.

In the latest quarter, they did $4.89. That was a beat over consensus. It's up 18.4% year-over-year. And here you can see the long-term earnings per share growth at Microsoft. Over the past 5 years, EPS is up 97.18%.

That's a 15.35% keer. Analysts are projecting continued high earnings per share growth in the coming years in the 16 to 27% growth annually.

And we'll come back to this, but I wanted to mention this, which is the commercial remaining performance obligations. Microsoft has a lot of booked revenue in the coming years.

This is from various contracts. Some of it is from companies like OpenAI on the infrastructure side and this is why they're building out a lot of these AI data centers. Although Microsoft has been purposefully not taking on all concentrated risk in open AI.

They've been diversifying a lot and they're trying to build out a lot for their own infrastructure and for enterprises as well who want more sovereign AI that's under their control.

Microsoft's big thing is they want open models and they want model interchangeability. They have their own models that they develop as well. Although they do have the infamous relationship with OpenAI and they have a large equity stake in the company and OpenAI is a large customer of theirs as well.

But Microsoft, it's a pretty diversified business. They have tons of different customers. They also work with Anthropic. Lots of large Fortune 500 companies work with them. But I brought up these RPOs to mention that they have $677 billion booked out, which is up 72.7% year-over-year.

So when you look at the analyst estimates, you see revenue expectations for Microsoft continuing to grow well into the future with fiscal year 2031 estimated at $869

They did $184 over the trailing 12 months. Over the past 5 years, the trailing 12 months P ratio has been 33.23. Currently, their trailing 12 months P ratio is 27.73.

So they're below their median historical average and I think no matter what way you're looking at it, the intrinsic value of Microsoft is growing right now. If we look at based on earnings per share, if we click on GAP, you can see the median was 33.23, which I just mentioned earlier.

Adjust earnings per share is 33.48. On a forward-looking basis, the median is 29.74. And in all three, Microsoft's trading below the median multiple right now.

And you can see it was well below fair value earlier this year when I thought Microsoft was a very attractive discount. And even right now it's trading below fair value.

And again, this is assuming fair value based on the median multiple that the stock has traded at over the past 5 years. We could also look at it over 10 years or all time. The 10-year median multiple is 31.1.

So, if Microsoft was to trade at that multiple today based on trailing 12 months earnings, it would give an implied fair value of $561, which is 5.7% upside from today's price.

Now, if I was valuing Microsoft stock, and I mentioned this in the Google video, too. I would be looking at it based on operating cash flow. So, over the past 10 years, the median price to operating cash flow it has traded at is 23.18.

Right now, trailing 12 months is 20.13. So you can see really all 2026 that's been trading below that median amount.

You can also see this fair value has been growing over time because the company's operating cash flow has been growing over time. Their intrinsic value has been growing. So even as the price goes up, there are times where the stock is cheaper than it was.

Just in the past 3 years, their operating cash flow is up 106%. So, if the stock returned to trading at their 10-year operating cash flow median multiple 23.18, that would give an implied fair value of $611, which is 15.1% upside from here.

And over the past 5 years, it looks even higher. Median multiple is 25.71. The implied fair value is $678. That'd be 27.7% upside from here.

However, similar to the Google video I just did a breakdown on because I covered Google earnings, they were the same day. Microsoft stock looks expensive based on this year's free cash flow and that's because they're investing so much in the future with the capex build out and AI data centers.

Now, they will make the argument that they think they're going to have a good payback period on it. And I think at a minimum, you have to say it's existential to their business.

But if you're valuing the company based on short-term free cash flow, Microsoft stock looks more expensive. And that's because free cash flow has gone down. It's trading at a historically high multiple right now 65.77 over the trailing 12 months and over the past 10 years the median has been 34.71 which is a premium itself.

So if Microsoft stock went back down to that median multiple with its declining free cash flow it would give an implied fair value of $280 which is 47% down from here.

Now in my opinion I think that can be misleading though for analyzing Microsoft stock but in the long run free cash flow is definitely the most important metric. So if Microsoft actually hits these earnings per share estimates in future years, what would that kind of mean for the stock price?

Well, one way to back into this is just kind of to predict what kind of multiple it will trade at in 2031.

So if we look at Microsoft today on a forward-looking basis and also projecting 16.4% growth based on today's stock price, that's a Ford P of 26.8. And based on today's price, based on those 2031 earnings, it's trading at 11.8 8p.

Now, when it gets to fiscal year 2031, it's not going to be trading at an 11.8 P unless something's gone horribly wrong. Microsoft hasn't traded that that multiple in decades.

But let's say they trade at a 26.8p ratio, which they already are today. It's not a crazy multiple. That would give an implied projected price by fiscal year 2031 of $1,22. That'd be 126% upside from here or 19.1% annualized.

So that's kind of just one way to think about what kind of returns you could expect with Microsoft. Now, of course, all of this could change. These are analyst estimates, which usually can be wrong.

And even looking at historical results is not always the best predictor of the future.

I'm still planning to hold Microsoft stock well into the future. I'm not necessarily adding right now, but if it does dip over the coming year, I could definitely see myself dollar cost averaging in again, building my position more.

I view this as a holding I'm going to have for many, many years to come.