The average business in the United States earns a return on equity of 14.5% right now (historically, American businesses have earned return on equity around 12.0%). In 2000, Microsoft was earning return on (unleveraged) equity of 36.0%. By coincidence, in 2019, Microsoft is also earning return on (unleveraged) equity of 36.3%.
Over the past nineteen years, Microsoft has managed to grow profits from $8 billion to $36.5 billion annually. While some of this is attributable to new products and greater penetration across various global markets, the greater percentage of Microsoft’s growth can be attributed to the greater velocity of Microsoft purchases that occur. In 1999, the average Microsoft consumer made a Microsoft purchase every 18.5 months. Nowadays, it is 7.5 months, and the figure is moving in the direction of 1 month as Microsoft has moved towards charging many personal and commercial businesses a monthly service cost for its host of subscription services.
For a long-term investor, the change in Microsoft over the past twenty years is quite significant because Microsoft transitioned from being a company where people made sporadic, high-profit margin purchases to a company where the customer base makes regular, high-margin purchases.
In light of this, it is no surprise that the company is sitting on $130 billion in cash and $70 billion in debt for a $60 billion cash surplus. What I find most notable about Microsoft right now is that the company is only-midstream in shifting most of its products towards the higher-profit monthly subscription model. The company is so dominant in the business sphere that many rules in the medical, legal, and other professional fields outright require the use of Microsoft Office and other Microsoft services as a default mode of communicating information.
I fully expect that Microsoft will grow its profits from $36 to $55-$60 billion over the next seven to ten years. In other words, I expect that Microsoft will generate total, cumulative profits of half-a-trillion dollars over the next decade. That means there is going to be $200 billion in dividends, $150 billion in share repurchases, and about $150 billion that can go towards acquisitions and new investments for shareholders during the years leading up to 2030.
For those who bought a couple hundred shares in their accounts in the 2013 range when the stock was still trading in the $20s, I think it will be looked upon over a fifty-year time period the way that we look back upon shrewd investors who bought Coca-Cola stock in the 1960s or 1970s today.
Microsoft effectively has a scalable license to print money. I put it on the list of buy-and-hold forever stocks. The cash engine of the company only has like maybe two dozen peers in the entire world, if that. The company has always defended its turf and enjoyed wildly high profit margins. What is staggering, and stands to make the shareholders serious wealth over the coming decades, is that the iterations of the purchases from the customer are becoming more and more frequent.
I highly recommend that each of you take a moment and read Microsoft’s annual report. It will self-evidently strike you as a wonderful business that is built to mint money at will for the long haul.
