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Welcome to our sixth newsletter!

This week another new name for the model portfolio, again from a sector we did not have yet: information technology. And not just any name, but a genuine tech giant that pretty much everyone knows or uses: Microsoft. A company that has grown enormously over the past 10 years and is now in a serious dip, exactly the kind of buying opportunity we love at TCC. Because there is nothing wrong with the underlying numbers and it remains a fantastic business. We are very enthusiastic about this name and about the current opportunity, and we are going to tell you in detail why Microsoft fits our long-term compounding strategy perfectly.

Microsoft (ticker: MSFT): the cloud and AI king with a rock-solid moat

Many people still know Microsoft mainly from Windows and Office. But Microsoft is much more than that. It has grown into one of the most powerful compounders in the world, driven by Azure (their cloud platform) and Copilot (their AI assistant). Azure lets companies rent servers, storage and AI services in the cloud instead of buying expensive hardware themselves. Copilot is the AI being built ever deeper into Office 365, Teams and Windows, making customers more productive. Microsoft has a wide moat thanks to network effects, high switching costs and an ecosystem customers can barely leave any more. After a period when the stock lagged, Microsoft has grown explosively over the past 10 years. And now it is in a clear dip: a good buying opportunity for the long term.

History
Microsoft was founded in 1975 by Bill Gates and Paul Allen in Albuquerque, New Mexico. It started as a small software outfit. They soon moved to Seattle, and in 1981 Microsoft struck a landmark deal with IBM: Microsoft would supply the MS-DOS operating system for the first IBM PCs. That turned out to be a masterstroke. Within a few years MS-DOS was the dominant operating system for computers. In 1985 Microsoft launched Windows, and with the introduction of Windows 95 in 1995 Microsoft became the undisputed king of the PC world. Office, Windows and Internet Explorer made Microsoft one of the most valuable companies in the world in the 1990s and early 2000s. It was a time of enormous profits and near-monopoly positions.

The period after that was harder, though. Under CEO Steve Ballmer (2000 to 2014) Microsoft still grew, but the company missed the boat on mobile and cloud. The acquisition of Nokia in 2013 turned out to be an expensive mistake, Windows Phone never got off the ground, and while the world switched to smartphones and cloud services, Microsoft held on too long to the old, familiar "Windows first" model. The share price stagnated for years and many investors saw Microsoft as an old giant past its prime. In that period the stock clearly underperformed the market. While rival Apple was going through enormous growth, Microsoft kept falling further behind.

That changed when Satya Nadella became CEO in 2014. He made a radical turn: from "Windows first" to "cloud and AI first". Azure, the cloud service launched in 2010, got priority and grew explosively. In 2019 Microsoft entered a strategic partnership with OpenAI and invested billions in AI. Copilot was integrated into Office, Windows and Teams. Instead of fighting the new world, Microsoft embraced it. The result is that over the past 10 years Microsoft has become one of the best-performing large tech companies: Azure grew from almost nothing to more than $60 billion in revenue, and the stock went from around $40 in 2014 to above $500 in 2025. As you can read, Microsoft has already put in absurd growth, so are we too late now? We do not think so.

The iconic Windows logo from the early years, from Windows 98 for instance:

Microsoft Windows 98 Sticker (Reproduction) | eBay

The numbers for the last 10 years (2016 to 2025)

Microsoft has posted impressive growth over the past 10 years:

Revenue: $85 billion in 2016 → roughly $280 billion in 2025 (average growth of about 13% to 15% per year).
Azure: grew from almost nothing to more than $60 billion in revenue in 2025, and is still growing 25% to 30% per year.
Net income: from $16 billion in 2016 to more than $101 billion in 2025.
Dividend: consistent growth averaging 9% to 10% per year, raised for more than 20 years in a row now. Current yield around 0.9%, which is low, but it is growing.
Payout ratio: comfortable at around 30% to 35% of free cash flow, so Microsoft keeps plenty back to reinvest in AI, cloud and acquisitions.

Over the last few years the growth has come mainly from Azure and from building AI into Office 365 and Windows.

The chart below shows revenue, operating profit and the share price over recent years.

Why is the stock in a dip right now?

After a strong run in 2023 to 2025, driven above all by the AI hype, Microsoft has pulled back somewhat in 2026. The stock currently trades at around $375, against a peak above $500 in 2025. Reasons for the dip:

A high valuation after the AI run (forward P/E of around 32x to 34x).
Investors worry about whether the enormous investments in AI will pay off quickly enough.
Macro uncertainty (high interest rates, geopolitics) is making investors more cautious about expensive growth stocks.

This is typical: after a strong stretch comes a breather. For long-term investors (hellooo TCC!) that is exactly what makes it an attractive entry point.

What to expect ahead

The next five to ten years look excellent for Microsoft. Azure keeps growing on the enormous demand for AI computing power, and Copilot keeps rolling out further into Office, Windows and Teams. Analysts expect revenue to grow 12% to 15% per year over the next three to five years, with even stronger profit margins thanks to the big advantages of scale in the cloud. Microsoft has an enormous cash flow and can keep investing in AI, acquisitions and buying back its own shares.

SWOT analysis

Strengths

An extremely strong moat in productivity (Office 365) and cloud (Azure).
A strong position in AI.
A very strong balance sheet and enormous free cash flow.
Consistent dividend growth.

Weaknesses

A high valuation leaves it exposed to disappointments.
Dependence on a couple of big growth engines (Azure and Copilot).
European countries want to be less dependent on the American market and on American companies. There is a search for alternatives, so that using American software is no longer effectively mandatory.

Opportunities

Further adoption of AI in business and in the consumer market.
Growth in emerging markets and in new vertical solutions.
Possible acquisitions, given the strong cash position.

Threats

Intense competition in cloud (AWS, Google) and in AI.
Regulation around AI and data privacy.
Macroeconomic pressure (high interest rates, recession).

Conclusion

Microsoft is a beautiful addition to our model portfolio. It combines a rock-solid moat, explosive growth in AI and cloud, and reliable dividend growth. After the strong 10-year run the stock is now in a clear dip: a good buying opportunity for the long term. We see this as a core holding for 10 to 15 years and beyond. Our entry level is around the current price ($371), and on a further dip below $360 we would add more aggressively.

In short: another quality stock with a wide moat. You know the drill by now: let the dividend and the profits grow, and let time do the work. Exactly what TCC stands for.

This is our opinion, not advice. Investing carries risk, including price declines and the possible loss of your investment. Always do your own homework.

See you next time!

The Compounding Club

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