Over the past few years, the operating profitability of Microsoft Corporation (MSTF) has declined. Here are the sustainable RNOA for fiscal years 2019-2024.
| 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | |
|---|---|---|---|---|---|---|
| RNOA | 119.5% | 94.7% | 110.9% | 89.0% | 58.0% | 57.3% |
While profitability decreased after 2021, the stock price increased from $124.3 to $415.70 over the same period. How can the stock price rise while profitability declines?
As chapter 6 instructs, there are two main drivers of value added (residual income), RNOA and net operating assets (NOA):
ReOIt = (RNOAt – rFirm) x NOAt-1
RNOA is the return per dollar of NOA, but residual operating income (ReOI) is determined by the amount of NOA earning at that rate of return. Here are the NOA for Microsoft from 2019-2024 (in billions):
| 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | |
|---|---|---|---|---|---|---|
| NOA | $46.9 | $54.4 | $81.5 | $125.3 | $157.3 | $267.7 |
While RNOA was declining, NOA was increasing. The is partly due to the acquisition of Activision Blizzard in 2023 and the continuing investment in cloud computing and AI. With this growth in NOA, the residual operating income for 2019-2024 (in billions with a required return of 8%) is increasing:
| 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | |
|---|---|---|---|---|---|---|
| ReOI | $33.7 | $40.6 | $56.0 | $66.0 | $62.6 | $77.5 |
RNOA and NOA are the two summary drivers of ReOI. These, in turn, are driven by their drivers. This is the fundamental analysis of chapter 7.
