Episode summary
Microsoft (MSFT): Undervalued Software Giant?
The Intrinsic Value Podcast
· · Hosts: Daniel Mahncke, Shawn O'Malley
Summary
Microsoft is presented as a high-quality business undergoing a rare valuation reset, with the stock down 35% in six months and trading around 20 times forward earnings after once changing hands at 40 times. The hosts argue the selloff looks excessive on the surface: the company still posted 17% top-line growth, 21% operating income growth, and 60% earnings growth on a $350 billion revenue base, while Azure grew 39% versus expectations of 40%. They see the market’s reaction as driven by both heavier capex and a new willingness to question Microsoft’s long-term software moat.
The central debate is whether Microsoft’s $70 billion office-software profit pool can survive the AI transition. The hosts think the biggest risk is not wholesale customer abandonment, but slower seat growth, weaker pricing power, and AI reducing the amount of human work needed in Word, Excel, and PowerPoint. They argue that Copilot has not yet meaningfully solved this problem, and that AI-native tools may gradually make the traditional Office workflow less essential.
At the same time, the cloud business remains a major strength. Azure, along with Microsoft’s broader intelligent cloud stack, is still growing quickly, and Microsoft benefits from GitHub, Visual Studio, and deep enterprise relationships. LinkedIn is described as a solid but non-core asset, and gaming is treated as interesting optionality rather than a thesis driver. The discussion ends with the idea that Microsoft could still win the AI era, but the market is now forced to price in real disruption risk.
Key takeaways
- The hosts think Microsoft’s 35% six-month selloff looks overdone given 17% revenue growth, 21% operating income growth, and 60% earnings growth.
- Microsoft is now cited as trading at about 20 times forward earnings, far below the roughly 40 times multiple investors paid six months earlier.
- The biggest bear case is not cloud weakness but erosion in the roughly $70 billion software profit pool tied to Word, Excel, and PowerPoint.
- Azure remains a major strength, with roughly $75 billion in run-rate revenue and about 39% growth, though capex remains a market concern.
- The hosts view LinkedIn and gaming as useful businesses, but not central to the investment thesis.
- AI may pressure Microsoft through lower seat demand and weaker pricing power rather than a sudden collapse in subscriptions.
Notable quotes
“Microsoft is without a doubt still one of the highest mode businesses in the world, but I would still say that it's in a very critical transition phase that it has to nail”
“the stock sold off 35% in the last 6 months. So that's exactly what I'm talking about. And that means Microsoft, the company of interest today, is now trading at a forward PE of just 20 times earnings”
“the market also disliked the massive capex investments, right? So, long story short, the earnings reaction is certainly overblown”
“I think the bigger question is what happens to the $70 billion profit pool still sitting inside their software business”
“AI is not offering a competing product per se. AI is essentially reducing the need for the product”
How the episode opens
Microsoft is without a doubt still one of the highest mode businesses in the world, but I would still say that it's in a very critical transition phase that it has to nail. Now,
You're not used to seeing the market doubt Microsoft the way it currently is. Usually, this is one of the most stable MAG7 companies out there, but that's also where it might be a rare opportunity to buy Microsoft at historically low multiples today. So we did that with Google and it was our most successful investment last year.
And today we will see if Microsoft can become our most successful investment this year. For long-term investors, the current market in some ways might look like a gift because you have some great companies that have sold off to attractive prices. And today we are talking about a company that has dominated the last 30 years of American tech like few others.
And despite what have looked like very solid numbers from this company in the last quarter, the stock sold off 35% in the last 6 months. So that's exactly what I'm talking about. And that means Microsoft, the company of interest today, is now trading at a forward PE of just 20 times earnings.
And mind you that just 6 months ago, investors were still willing to pay 40 times earnings for this company. And it's even more interesting if you compare how Google and Microsoft have performed since Chet GPD came out. Because I still remember that, you know, Ched GPD was supposed to be the end of Google and Microsoft through owning a stake in OpenAI was kind of seen as the big AI winner among the Max 7.
And then now fast forward a little more than 3 years and Google is up 200% and Microsoft is kind of trailing Google significantly.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- microsoft moats
- cloud growth
- office competition
- ai impact on software
- value portfolio
Companies and tickers mentioned
- MSFT
- Microsoft
Watch the episode
Watch “Microsoft (MSFT): Undervalued Software Giant?” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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The Intrinsic Value Podcast, this episode and its artwork belong to The Investor's Podcast Network. Octagon is not affiliated with the show; this page is an independent summary.
