No. of Recommendations: 9
My son doesn’t have any control over the price right now, as the stock grants just come when they are scheduled. And the ESOP thing is on auto pilot. He does get a pretty good discount off the market price, but he’s definitely buying at a rich valuation right now.
Maybe he should stop the ESOP and put that to cash instead? I think he gets a 15% discount.
Cardude, if your son would prefer to be compensated in cash than in MSFT shares at a 15% market discount, maybe we can arrange a trade!
Seriously, short of truly stratospheric multiples, I think the lesson of Microsoft under Satya Nadella is just roll with market sentiment. They are crushing it on all fronts. There are occasional lulls when they grow into their multiple, but they don't last long.
I bought a 2% position in 2016. They had revenues of $91 billion and net income of $20.5 billion that (fiscal) year. I sold 40% of it in 2021 because of, you know, valuation concerns. The sale returned 88% of the capital I invested originally. The stock is up 75% since then and is now my biggest position because thankfully I stopped messing with it. In the fiscal year that ended last summer, they had revenues of $212 billion and net income of $72 billion. They are currently building artificial intelligence into their massive, entrenched, enterprise software subscription businesses, with price hikes to match. What are the margins on AI assistants -- its various "co-pilots"? We have no idea. And won't, for a while.
The trailing P/E, which will change this week with the fiscal Q2 report, is 39. That certainly seems high for such a behemoth -- the most valuable public company in the U.S. at the moment -- but Q1 net income was up 27% year over year, the cloud business is No. 2 to AWS and growing faster, and AI revenue is just beginning. If it fell 15% from its current quote to $348, the discount available to your son, the trailing P/E would be 33.
If they meet analyst estimates for Q2 (year-over-year EPS growth of 26%) the P/E on shares discounted by 15% will be 32. Also, they generally beat estimates, so these numbers might be marginally better.
I get the valuation concern, but I also get the regret that comes with cutting and running too soon when you're lucky enough to own a great investment. Please tell your son an anonymous internet message board poster (totally reliable!) thinks he's very fortunate and should buy every discounted MSFT share on offer. Look at it this way: If he turns right around and sells them, the discount will cover most of his tax bill!
