Summary
What it does: enterprise software.
Elevator pitch: arguably one of the finest franchises ever built, with deep distribution advantages that let it deliver innovations cheaply to a huge customer base.
Mental model: moat (read about my mental models here).
Valuation and potential returns: 21x June 2027 EPS estimates and growing EPS 20% per year.
Exchange and ticker: Nasdaq, MSFT
Stock price and market cap: $422, $3.1t.
Do I own it? Yes.
IR website: here.
Tag for finding my other articles on this stock: MSFT
Links to Part I: Silicon and Infrastructure and Part II: LLMs and Agents.
About this blog: I have been investing for 25 years, professionally and personally. I look for stocks that have a high probability of compounding at 15% for at least 5 years with limited downside. I write these stocks up on my blog. You can find more about me, my philosophy, my mental models, and my portfolio structure on my site.
Disclaimer: This post is for informational and educational purposes only. Building Arks is not licensed or regulated to provide any financial advisory service and nothing published by Building Arks should be taken as a recommendation to buy or sell securities, relied upon as financial advice, or treated as individual investment advice designed to meet your personal financial needs. You are advised to discuss your personal investment needs and options with qualified financial advisers. Building Arks uses information sources believed to be reliable, but does not guarantee the accuracy of the information in this post. The opinions expressed in this post are those of the publisher and are subject to change without notice. The publisher may or may not hold positions in the securities discussed in this post and may purchase or sell such positions without notice.
Welcome to the final instalment in my Microsoft saga. The goal of this piece is to determine whether Microsoft can compete over the next 5-10 years. Part 1 introduced the layers of AI the AI stack and looked at two, silicon and infrastructure. Part 2 dived into two more, LLMs and the agentic stack. Part 3 starts with distribution and bundling, and then considers whether layers can be combined to create competitive advantage before drawing everything together in conclusion.
Distribution and bundling
Distribution and bundling have been Microsoft’s deepest moat for years. Through Windows and Office alone, they are in virtually every enterprise IT department and on virtually every enterprise employee’s screen. When a competing product comes along, they clone it and bundle it into an existing suite of products. Suddenly it’s on every desktop, for nothing. It’s not as good as the standalone competitor initially, but it is there and it is free. Adoption skyrockets. Over time Microsoft improves the product and then monetises it by re-segmenting the bundle.
On top of that, Microsoft sells trust. They wrap the bundle in all the things IT departments love - permissioning structures, data security. But they don’t charge too much. They’re selling software, so the gross margin on the incremental sale is extremely high. They can afford to keep the price of the bundle well below the total price of all the standalone options you’d have to buy to replace it. (Years ago a colleague of mine looked at this. Everyone at our company lived in Microsoft products all day - literally all day - yet the company spent less with Microsoft than it did on milk.)
The bundle has all the products you want, wrapped in all the compliance and security stuff you need; it requires managing one vendor relationship rather than 10; and it costs peanuts. What IT department wouldn’t use it? Code was never the moat. The cost to replicate the products has been falling for years and is tiny compared to the market opportunity. Distribution, bundling, trust, scale, and price were the moat.
Does AI change this? I don’t think so, but there are wrinkles.