How Microsoft Has Changed Since Its IPO

Microsoft went public on March 13, 1986 at $21 per share (Wikipedia). Split-adjusted, that works out to roughly $0.08. The stock closed 2025 at $484 (Finance Toolkit historical data), a return of more than 5,000x over four decades and one of the best compounding records in market history.

The stock price alone hides how much the company underneath has changed. The Microsoft that went public in 1986 and the Microsoft that generates $282 billion in annual revenue today are very different companies. The financials show three distinct businesses operating under the same name, each shaped by a different CEO, product strategy and approach to capital. Pulling 40 years of data through the Finance Toolkit makes those changes easy to see.

In this article I use the Finance Toolkit to analyze Microsoft’s financial history. It also includes MCP prompts at the end of each section so you can run the same analysis yourself. For more information on Finance Toolkit, have a look here. To run the same analysis conversationally, explore the Finance Toolkit MCP server.

Setting Things Up

Start by installing the Finance Toolkit:

pip install financetoolkit

Then import the library and create a Toolkit instance for Microsoft, specifying the ticker, your FMP API key, and the start date for historical data:

from financetoolkit import Toolkit

company = Toolkit(
    tickers=["MSFT"],
    api_key="FINANCIAL_MODELING_PREP_KEY",
    start_date="1986-01-01"
)

Get your FMP API key at jeroenbouma.com/fmp. The free plan covers five years of history; a paid plan gives access to the full 40-year dataset used here.

Revenue: Three Very Different Eras

Microsoft’s revenue history divides cleanly into three phases, each corresponding to a CEO tenure: Bill Gates (1986-2000), Steve Ballmer (2000-2014), and Satya Nadella (2014-present).

income_statement = company.get_income_statement()

revenue = income_statement.loc[
    ["Revenue", "Net Income"],
    ["1986", "1990", "1995", "2000", "2005", "2010", "2015", "2020", "2025"]
]

Which returns:

Growth in the Gates era was exceptional. Revenue grew from $197 million in 1986 to $23 billion in 2000, a 115-fold increase in 14 years driven almost entirely by Windows and Office on the back of the PC revolution. In economic terms Microsoft was a licensing business, with near-zero cost of reproduction and near-monopoly pricing power.

The Ballmer era is often described as a lost decade, but that framing is partly unfair. Revenue grew from $23 billion to $87 billion between 2000 and 2014 (Finance Toolkit income statement), which is real growth. The problem was the valuation. Ballmer inherited Microsoft at the height of the dot-com bubble, when the market was pricing in decades of compounding at rates no company could sustain. The business kept growing, but the starting price was too high, so the stock went roughly nowhere for 14 years.

The 2015 net income of $12.2 billion against $93.6 billion in revenue reflects Nadella’s first full year, when Microsoft took a $7.5 billion write-down on the Nokia acquisition (Wikipedia). Excluding that charge, the underlying business was already accelerating. Net income grew to $44 billion by 2020 and reached $102 billion in 2025, a level that would have been hard to imagine when Nadella took over.

Try this in the Finance Toolkit MCP: “Show me Microsoft’s annual revenue from 1986 to 2025, and identify the three distinct growth phases under Gates, Ballmer, and Nadella.”

Profitability: Margins That Compress, Then Recover

Margins have moved around more than revenue has.

ratios = company.ratios.collect_profitability_ratios()

margins = ratios.loc[
    ["Gross Margin", "Net Profit Margin"],
    ["1990", "1995", "2000", "2005", "2010", "2015", "2020", "2025"]
]

Which returns:

Gross margins peaked near 90% in the mid-1990s, which is what pure software economics look like: once the disc was pressed, distributing a copy of Windows cost almost nothing. As Microsoft expanded into hardware (Xbox, Surface), services, and cloud infrastructure, the cost structure changed. Running Azure compute costs real money, as do gaming content, data center operations, and technical support at enterprise scale. By 2015, gross margins had compressed to 64.7%.

Gross margins have since largely stabilized. Azure’s gross margin has improved as the infrastructure matures and higher-margin software services (Azure AI, Microsoft 365, Copilot) grow as a share of the mix. Net margin is the more important metric here, and it has recovered to 36.2% in 2025, approaching the levels Microsoft achieved at the peak of its software monopoly in 2000. The 2015 net margin of 13% is an outlier caused by the Nokia write-down rather than a structural deterioration.

The recovery comes from operating leverage. Revenue nearly tripled from 2015 to 2025, but operating expenses did not. Each additional dollar of cloud or subscription revenue drops to the bottom line at an increasingly favorable rate.

Try this in the Finance Toolkit MCP: “What were Microsoft’s gross margin and net profit margin at five-year intervals from 1990 to 2025? Highlight where margins compressed and where they recovered.”

The Balance Sheet Tells a Story by Decade

Early Microsoft had no debt at all. The business generated more cash than it could spend and management had no desire to lever up, so for most of the Gates era and the first half of the Ballmer era the balance sheet simply accumulated cash.

balance_sheet = company.get_balance_sheet_statement()

snapshot = balance_sheet.loc[
    ["Cash and Short Term Investments", "Long Term Debt", "Goodwill"],
    ["1995", "2000", "2005", "2010", "2015", "2020", "2025"]
]

Which returns:

The first debt appeared in 2009 (Finance Toolkit balance sheet). Microsoft did not need the money, but borrowing at low rates to fund buybacks was more tax-efficient than repatriating overseas cash. By 2020, cash and investments had reached $136 billion while long-term debt stood at $60 billion. The net position was still comfortably positive, but the capital structure had become more aggressive.

The largest shift is in goodwill. It was zero for most of Microsoft’s history because the company built rather than bought. That changed under Ballmer with acquisitions like aQuantive and Skype, and accelerated under Nadella. LinkedIn ($26 billion, 2016), GitHub ($7.5 billion, 2018), Nuance ($19 billion, 2022), and Activision Blizzard ($69 billion, 2023) turned Microsoft into one of the most acquisitive companies in tech (Wikipedia). Goodwill reached $119.5 billion in 2025.

The cash balance fell from $136 billion in 2020 to $94.6 billion in 2025, largely because of Activision. Long-term debt has declined from its peak of $66.7 billion in 2019 (Finance Toolkit balance sheet) to $40.2 billion in 2025 as Microsoft pays down the acquisition-related borrowing, a sign that the balance sheet is normalizing after the deal.

Free Cash Flow: The Number That Matters Most

Revenue and earnings can be managed, while free cash flow is harder to fake. It is also the number that ultimately determines what a company is worth: the actual cash that flows out of the business after maintaining and expanding the asset base, rather than earnings per share or operating income.

cash_flow = company.get_cash_flow_statement()

fcf_table = cash_flow.loc[
    ["Operating Cash Flow", "Capital Expenditure", "Free Cash Flow"],
    ["1995", "2000", "2005", "2010", "2015", "2020", "2025"]
]

Which returns:

Microsoft generated $71.6 billion in free cash flow in fiscal 2025, more than the entire annual revenue of companies like Netflix or Airbnb. That comes from two things: subscription and consumption revenue that scales without proportional cost increases, and a customer base so embedded in Microsoft’s products that churn is structurally low.

There is a caveat in those numbers. Capital expenditure has increased from $5.9 billion in 2015 to $64.6 billion in 2025, the vast majority of it AI infrastructure. Microsoft is making a large bet on data center capacity to support Azure AI and Copilot services, and whether that $65 billion in annual CapEx generates returns commensurate with its cost will be the main capital allocation question of the next five years. For now, operating cash flow has grown fast enough to absorb it, but the ratio of FCF to operating cash flow has compressed.

Try this in the Finance Toolkit MCP: “What was Microsoft’s free cash flow in 2015 and 2025? Show the operating cash flow and capital expenditure over time.”

Return on Equity: What Buybacks and Leverage Changed

Return on equity is often read as a clean measure of profitability, but it depends on the size of the equity base, which Microsoft has spent the last 15 years shrinking through aggressive buybacks and debt-funded capital return. A company can raise its ROE by buying back enough shares to reduce equity even if underlying profitability does not improve.

profitability_ratios = company.ratios.collect_profitability_ratios()

profitability_ratios.loc[
    ["Return on Equity", "Return on Assets", "Return on Invested Capital"],
    ["1990", "1995", "2000", "2010", "2015", "2020", "2025"]
]

Which returns:

The early numbers show what a capital-light monopoly looks like. An ROE of 38% in 1990 with zero debt and no buybacks means the underlying business really was that profitable. Those returns compressed through the 2000s as the business mix changed and the equity base remained large.

The 2015 figures are distorted by the Nokia write-down, which depressed net income and inflated the apparent collapse in ROA and ROE. By 2020 ROE had rebounded to 40%, though this partly reflects the equity base shrinking from buybacks rather than purely improved profitability. ROIC strips out the effects of capital structure and gives a cleaner picture: Microsoft earns roughly 30-31% on invested capital today, which is strong but not far from what it earned in the 1990s. The quality of the business has held up; what changed is how the returns are distributed to shareholders.

Return on assets shows something similar. ROA of 18% in 2025 reflects that Microsoft now carries a much heavier asset base of cloud infrastructure, acquisitions, and data centers than the software company of the 1990s. The 30%-plus ROA of the Gates era (30.6% in 1990) is gone, but 18% is a strong number for a company of this size and scope.

Looking Ahead

Forty years of operating history show what Microsoft has been, while valuation multiples show what the market expects it to become. The tables below show where Microsoft’s key ratios and risk-adjusted performance metrics have stood over the past six years, alongside the Alpha and Beta figures that put the stock’s behavior in market context.

valuation_ratios = company.ratios.collect_valuation_ratios()

current_valuation = valuation_ratios.loc[
    ["Price-to-Earnings", "Price-to-Book", "Price-to-Free-Cash-Flow", "EV-to-EBITDA"],
    ["2020", "2021", "2022", "2023", "2024", "2025"]
]

performance = company.performance.collect_all_metrics()

alpha_beta_performance = performance.loc[
    ["2020", "2021", "2022", "2023", "2024", "2025"],
    ["Beta", "Alpha"]
]

Which returns:

At 35x earnings and 50x free cash flow, Microsoft is priced for sustained growth. The P/FCF ratio in particular looks stretched on the surface, but it needs to be read alongside the elevated CapEx. Microsoft spent $64.6 billion on capital expenditure in fiscal 2025, the vast majority of it on AI infrastructure. If that investment generates meaningful Azure revenue growth over the next three to five years, the normalized FCF picture is more attractive than the headline ratio suggests. If it does not, the multiple will prove optimistic.

The drop in beta to 0.88 in 2025 stands out. For most of the Nadella era, Microsoft moved in line with or slightly above the broader market. A beta below 1 suggests the market increasingly treats it as a defensive-quality holding: a large, profitable, cash-generative business that belongs in portfolios regardless of the macro environment.

Alpha has been positive in most years, notably +0.33 in 2023 when Microsoft’s AI positioning drove a 57% stock return (Finance Toolkit historical data) against the S&P 500’s 26%. The negative alpha in 2022 and 2024 reflects years when the market rotated toward other sectors rather than any fundamental deterioration, as the business kept compounding throughout.

What I would watch over the next few years is the pace of Azure growth (which funds everything else), margin expansion as the AI CapEx cycle matures, and whether Activision contributes enough to earnings to justify the $69 billion price tag. The 40-year financial track record gives Microsoft the benefit of the doubt, but at these valuations the margin for error is narrower than it has been at any point in the company’s history outside the dot-com peak.