u/drewangell ·
Reddit — r/ValueInvesting
· June 25, 2026 at 02:53
· ⬆ 24 pts
· 💬 42 comments
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Summary
The post applies Phil Town’s “Rule One Investing” framework to Microsoft (MSFT), calculating a sticker price of ~$388.77 and a 50% margin-of-safety buy price of ~$194.39.
Author argues MSFT is a high-quality business (passes the Big 5 metrics) but is currently trading above the Rule One buy threshold, so it is not a buy now.
Thesis: Only buy MSFT if the price falls another ~50% to ~$194; if that occurs, the author recommends buying big.
Quality assessment: Well-researched DD using a structured value-investing framework, though the model is mechanical and relies on backward-looking growth assumptions.
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Are you familiar with the book "Rule One Investing" by Phil Town? It basically gives you specific steps for analyzing a company using the Buffett method, and I find it interesting to look at MSFT this way.
Basic gist of this breakdown - MSFT is currently at its "Sticker Price" which (in theory) would result in \~15% returns over the next 10 years if you bought it now. But the "rule one" method applies a 50% margin-of-safety, so it would still have to fall another 50% before it would be a buy...and if that happens, buy big.
# How to calculate a Rule One “Sticker Price” + MSFT example
The Rule One framework is basically:
1. Check whether the business is high quality.
2. Estimate a conservative intrinsic value, called the “Sticker Price.”
3. Only buy with a 50% margin of safety.
# Part 1: The Big 5 Numbers
Before calculating Sticker Price, Rule One checks whether the business has a real moat. The “Big 5” are:
1. ROIC
2. Sales growth
3. EPS growth
4. Equity / book value growth
5. Cash flow growth
The rough Rule One target is **10%+ per year** over the long term.
# How the Big 5 are calculated
For sales, EPS, equity, and cash flow, use Compound Annual Growth Rate:
CAGR = (ending\_value / starting\_value)^(1 / years) \- 1
For ROIC, use an average:
ROIC = net\_income / (equity + long\_term\_debt)
Then average ROIC over the period.
# MSFT Big 5
Using Microsoft’s annual data through FY2025:
|Metric|Long window|5y|3y|1y|Read|
|:-|:-|:-|:-|:-|:-|
|ROIC avg|23.7%|29.5%|27.7%|26.3%|Pass|
|Sales growth|13.4%|14.5%|12.4%|14.9%|Pass|
|EPS growth|20.4%|18.8%|12.2%|15.6%|Pass|
|Equity growth|17.1%|23.8%|27.3%|27.9%|Pass|
|Operating cash flow growth|16.9%|17.6%|15.2%|14.9%|Pass|
|Free cash flow growth|12.4%|9.6%|3.2%|\-3.3%|Mixed|
MSFT passes the Big 5 overall. The one caution is free cash flow growth, which has been pressured by the AI/data-center CapEx buildout. Operating cash flow is still very strong, so one might treat FCF as a watch item rather than an automatic fail.
# Part 2: Sticker Price
The Sticker Price is a conservative intrinsic value estimate.
# General steps
1. Start with current TTM EPS.
2. Pick a future EPS growth rate.
Use the lower of:
* historical equity/BVPS growth
* analyst consensus EPS growth
1. Pick a future PE.
Use the lower of:
* 2 × growth rate
* historical average PE
1. Project EPS 10 years out.
future\_eps = current\_eps × (1 + growth\_rate)^(10)
5. Estimate the future market price.
future\_price = future\_eps × future\_PE
6. Discount back to today.
Rule One usually uses a 15% MARR:
sticker\_price = future\_price / (1.15^(10))
7. Apply a 50% margin of safety.
MOS\_price = sticker\_price × 0.5
# MSFT Sticker Price example
Current inputs:
* Current MSFT price: $365.46
* TTM EPS: $16.77
* Historical equity growth: \~17.1%
* Analyst EPS growth: \~13.37%
* Growth rate used: 13.37%
* Historical average PE estimate: \~31
* Future PE used: 26.74
* MARR: 15%
* MOS factor: 50%
# Step 1: Start with current EPS
current\_eps = $16.77
# Step 2: Pick growth rate
historical\_equity\_growth = 17.1% analyst\_growth = 13.37%
growth\_rate = lower of 17.1% and 13.37% growth\_rate = 13.37% = 0.1337
# Step 3: Pick future PE
2 × growth\_rate = 2 × 13.37 = 26.74 historical\_avg\_PE ≈ 31
future\_PE = lower of 26.74 and 31 future\_PE = 26.74
# Step 4: Project EPS 10 years out
future\_eps = $16.77 × (1 + 0.1337)^(10) future\_eps = $16.77 × 1.1337^(10) future\_eps = $16.77 × 3.5074 future\_eps = $58.82
# Step 5: Estimate future market price
future\_price = future\_eps × future\_PE future\_price = $58.82 × 26.74 future\_price = $1,572.81
# Step 6: Discount back to today
discount\_factor = 1.15^(10) discount\_factor = 4.0456
sticker\_price = future\_price / discount\_factor sticker\_price = $1,572.81 / 4.0456 sticker\_price = $388.77
# Step 7: Apply margin of safety
MOS\_price = sticker\_price × 0.5 MOS\_price = $388.77 × 0.5 MOS\_price = $194.39
# Result
MSFT Sticker Price: \~$388.77
MSFT Rule One MOS Buy Price: \~$194.39
Current price: $365.46
So under this version of the Rule One math, MSFT looks like a great business trading below Sticker, but still far above the Rule One MOS buy price.
MSFT has strong historical ROIC (avg 23.7%), sales growth (13.4%), EPS growth (20.4%), and equity growth (17.1%) over the long term; FCF growth is mixed but operating cash flow remains strong. The Rule One model suggests a sticker price of ~$389 (current price $365 is below that) but a 50% margin-of-safety price of ~$194, implying the stock must drop ~50% to become a compelling buy. The author is bullish on MSFT’s business quality but does not recommend buying at current levels; instead, he flags a conditional buy opportunity if the stock falls to ~$194. AI CapEx pressure could erode free cash flow further; secular growth rates may slow; market sentiment may never push MSFT to that price; the model’s growth and PE inputs are estimates.