American Express earned their spot on my Wall of Shame (and thus, never ever ever use again list) when in 2002, I paid my corporate credit card online 2 days before the bill was due, but was told to allow 5 days for electronic delivery.  I was charged a late fee and, upon discussion with customer support (service would be too generous), they refused to reverse the charges.  In typical DRW fashion (as you know from the book, I was A LOT more high energy then) I said “Can you hear that sound?  It’s me cutting up my American Express card because I will NEVER EVER EVER use your card again.” It felt really good, but really limited my ability to put things on the company credit card, so perhaps I should have spent more time thinking about that.  However, in the intervening 20 years, at a monthly spend rate of …. well, you know, that decision not to waive the late fee cost them A LOT of money.

Flash forward to 2019 when Avis joined American Express.  I won’t digress here, but I did a hottake on it at the time, so you can read at your leisure because this post is not about Avis.  It is about Microsoft, which I admit is problematic to be added to the Wall of Shame.  As you know, Microsoft owns LinkedIn and clearly, I can’t NOT use Microsoft products.  That would be dumb.  And as much as I’d like to punish LinkedIn, I can’t actually log onto their platform so… I’m kind of powerless to react (although I do enjoy Tweeting at their head of security and CEO occasionally).

So, I did the only thing I can do:  I added them to my “DO NOT BUY LIST”.  Take THAT!  Ha (although I admit that this little win isn’t really a win because they are a gigantic portion of any index fund I would own so I will still have to own them, but I can feel good that they were added to Tesla as individual stocks I don’t own.  There… I’ll show you while your stock goes up every day no matter the news!)

As you will see, the reality is Microsoft is a cash machine, you only have to skim the 10K to see that.  Let’s take a look at what I’m missing out on.

Even for people that don’t read financial statements every day, that is incredibly pretty.  14% revenue growth, 66% gross margins, growing dividends and net income that has more than doubled since 2016.  None of this should be surprising.

How about the cash flows?  As we have talked about when we talk financial statements, net income is neat but with non cash charges and gains that all roll into that number, it doesn’t really give you a sense of what’s going on.  Cash is king, and Microsoft is a beast.

In 2019, they had $60.675 billion in operating cash flows, which is up from $52.2 in 2018 and $43.9 billion in 2017.  And in terms of investing for the future (known as CAPEX), it’s a measly $12.2, $15.7 and $6 billion respectively over the last 3 years.  Think about that free cash flow for a second.  More than $48 billion in FREE CASH in 2019 which, of course, was used to buy back $23 billion of stock, pay $15 billion of dividends and retire $5.5 billion of debt.  Now compare the world’s formerly largest company Exxon, to Microsoft in terms of business model and cash generation and it’s pretty obvious why one has the market cap that is now more than 10x that of the former.

The company is pristine.  Even their debt and obligations, as shown in the table below, are so manageable, their long term debt is effectively equal to one year of operating cash flow, and about 1.4 years of free cash flow.

So.  How much is this company WORTH?  Their market cap is $1.7 TRILLION, and with $67 BILLION in long term debt, they trade 30x operating cash flow.  Now, you can build a financial model that assumes a 14% growth rate, like they achieved last year, and by 2030 they will have generated over $1 trillion dollars of free cash flow to pay $330 billion of dividends and buy back $700+ billion of stock, cash flowing $178 billion per year (net of investment).  OR, they could slow down and grow at 5%, which would only generate $630 billion in free cash, pay $198 billion in dividends and have the company cash flowing $78 billion.

And THAT is why growth matters.  Who the heck knows, but when a banks analyst or talking head goes on TV, you can’t tell them they are wrong in their assumptions.  So they can justify any valuation.  Growth masks everything, and it’s why for more than a decade as the shale revolution played out, growth was more important than profitability.  And, in a 0% interest environment, like we are today, everyone rushes to technology stocks to wait it out because they don’t have an intrinsic value.

So when oil and gas people wonder where all the investors have gone….I simply show them this chart.

Microsoft is a behemoth and a cash machine, and I really like Excel.  But growth is a thing, until it isn’t, and companies have a life cycle.  They are built, they grow, they stagnate, and then they die… because innovation, capitalism, and disruption are a thing.  As always, it’s not investment advice, but interesting to contemplate.