Microsoft Corporation (MSFT) Valuation Report

Intrinsic Value
$1.6T

Value Per Share
$214 -47%

Price Target
$238 -42%

Market Cap
$3T

Enterprise Value
$3T

Price
$407.00 -0.12%

Dividend Yield
0.7%

Adjusted Yield
1.0%

TTM Growth Margin Ratio Yield
Revenue $228B 11.5% 13.3x
Gross $159B 14.0% 69.7% 19.0x
EBITDA $117B 19.3% 51.4% 25.8x
EBIT $99B 18.8% 43.7% 30.4x 3.3%
Profit $83B 22.4% 36.3% 36.6x 2.7%
FCFF -$16B -166.1% -7.1% -187.7x -0.5%
FCFE $10B -64.0% 7.9% 299.6x 0.3%
Cost of Equity = 8.1% | Cost of Capital = 8.0%Currency: USD | Updated:
Sector: Technology | Industry: Software—Infrastructure | Read more...

Microsoft Corporation develops, licenses, and supports software, services, devices, and solutions worldwide.
The company operates in three segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.
The Productivity and Business Processes segment offers Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance, Microsoft Viva, and Skype for Business; Skype, Outlook.com, OneDrive, and LinkedIn; and Dynamics 365, a set of cloud-based and on-premises business solutions for organizations and enterprise divisions.
The Intelligent Cloud segment licenses SQL, Windows Servers, Visual Studio, System Center, and related Client Access Licenses; GitHub that provides a collaboration platform and code hosting service for developers; Nuance provides healthcare and enterprise AI solutions; and Azure, a cloud platform.
It also offers enterprise support, Microsoft consulting, and nuance professional services to assist customers in developing, deploying, and managing Microsoft server and desktop solutions; and training and certification on Microsoft products.
The More Personal Computing segment provides Windows original equipment manufacturer (OEM) licensing and other non-volume licensing of the Windows operating system; Windows Commercial, such as volume licensing of the Windows operating system, Windows cloud services, and other Windows commercial offerings; patent licensing; and Windows Internet of Things.
It also offers Surface, PC accessories, PCs, tablets, gaming and entertainment consoles, and other devices; Gaming, including Xbox hardware, and Xbox content and services; video games and third-party video game royalties; and Search, including Bing and Microsoft advertising.
The company sells its products through OEMs, distributors, and resellers; and directly through digital marketplaces, online stores, and retail stores.
Microsoft Corporation was founded in 1975 and is headquartered in Redmond, Washington..

Full-time employees: 221,000 | HQ: Redmond
Website: https://www.microsoft.com

Valuation

Input

Revenue Growth

EBIT Margins

Reinvstment Efficiency

Cost of Capital

Tax

MSFT Valuation Output

Terminal value

$2.1T

+ PV Terminal Value

$972B

+ PV FCFF

$622B

= Sum of PV

$1.6T

+ Cash

$81B

- Debt

$74B

= Intrinsic Value

$1.6T

Value Per Share

$214

Overvalued by 47% vs its $407 Price

1-Year Price Target

$238 (-42%)

10-Year Fundamental Projections for Microsoft Corporation (MSFT)
YearGrowthSalesEBIT %EBITTaxNOPATReinvestmentROICFCFFWACCPV FCFF
TTM 8.6% $228B 43.7% $99B 19% $81B $87B 35% -$16B 8.0% --
2025 8.6% $247B 43.7% $108B 19% $87B $20B 35% $68B 8.0% $63B
2026 8.6% $268B 43.7% $117B 19% $95B $21B 35% $74B 8.0% $63B
2027 8.6% $291B 43.7% $127B 19% $103B $23B 35% $80B 8.0% $64B
2028 8.6% $317B 43.7% $138B 19% $112B $25B 35% $87B 8.0% $64B
2029 8.6% $344B 43.7% $150B 19% $122B $27B 35% $94B 8.0% $64B
2030 7.7% $370B 43.7% $162B 20% $129B $33B 34% $96B 8.0% $61B
2031 6.9% $396B 43.7% $173B 21% $137B $32B 33% $105B 8.0% $61B
2032 6.0% $420B 43.7% $183B 22% $143B $30B 32% $113B 8.0% $61B
2033 5.1% $441B 43.7% $193B 23% $148B $27B 32% $121B 8.0% $61B
2034 4.3% $460B 43.7% $201B 24% $153B $24B 31% $129B 8.0% $60B
♾️ 4.3% $480B 43.7% $210B 25% $157B $79B 8.5% $78B 8.0% --
How is MSFT's expected return calculated?

The expected return is a percent (%) estimate of how much a stock's value will change per year. It is used to calculate MSFT's 1-year price target by multiplying the stock's present value with (1 + expected return). The expected return is calculated using a stock's risk (cost of capital), excess returns, and dividend yield.

Expected Return = (1 + Cost of Capital) * (Cost of Capital * (1 + ROIC - Cost of Capital - Dividend Yield))
10.9% = 108.0% * (8.0% * 126.2%)

We exclude dividend payments because they aren't reflected in a stock's price. Note that excess returns are highly dependant on our estimate of invested capital and its return. Neglecting to capitalize expense items such as operating leases, R&D, brand name marketing expenses, may inflate the excess return estimate.

Growth

In the 12 months ending Q2'24 Microsoft Corporation (MSFT) grew revenues by 11.5%, from $204B to $228B - indicating an acceleration of revenue growth. MSFT has a 5-year and 3-year revenue compound annual growth rate (CAGR) of 11.1% and 7.2% respectively.

Revenue Growth Estimates

Sustainable
7.9%
Fundamental
20.1%
Priced-in
11.0%

Bottom Line Growth Estimates

Fundamental Earnings Growth
0.2%
Fundamental EBIT Growth
15.7%
Priced-in FCFF Growth
8.6%

Looking at forward estimates, we can see that the market is pricing-in a 11.0% long-term revenue growth rate, while the financials indicate a future revenue growth rate between 7.9% and 20.1%.

Using the average of these 3 estimates we get a 13.0% long-term revenue growth for MSFT.

What is MSFT's sustainable revenue growth?

Similar to fixed vs variable costs, the sustainable growth rate shows how much we can expect the company to grow based on their reinvestment into the business, excluding variable demand and pricing. This rate may be helpful as a long-term baseline for the company.

(MSFT) has invested $232B in total capital, consisting of $238B in book value of equity, plus $74B in total debt, less $81B in cash & equivalents.
By adding on the average reinvestment of $36B in the last 4 quarters on a TTM basis to the $232B capital base, and applying the current sales to capital ratio of 98.3%, we can expect the company to grow its revenue to $263B, implying growth of 15.8%. However, we assume at least one gap year for CapEx to transform into growth, so we divide the rate by 2 and get a 7.9% sustainable revenue growth.
Use your own judgement based on the type of business since it takes time for reinvestment to yield growth.

What are MSFT's fundamental revenue & EBIT growth rates?

The fundamental growth rates analyze how much (MSFT) is reinvesting into the business, adjusted for the quality of those reinvestments to come up with an estimate for a long-term future growth. Both fundamental and sustainable gorwt rate estimates attempt to use fundamentals in estimating growth.

Microsoft Corporation (MSFT) has reinvested an average of $36B on a rolling TTM basis, reflecting a reinvestment rate of 45.0%, calculated as:
Reinvestment / (EBIT - Tax) a.k.a. NOPAT.
By multiplying the reinvestment rate with the return on invested capital (ROIC) we get a long-term estimate for a growth in EBIT:
45.0% * 34.9% = 15.7% (Reinvestment rate * ROIC)

In order to convert this to a fundamental revenue growth rate, we analyze the relationship between EBIT growth and Revenue growth, and come up with a scaling factor of 128.3%. We then multiply the fundamental EBIT growth estimate by the revenue scaling factor and get an equivalent for a fundamental revenue growth rate of 20.1%.

What FCFF & revenue growth rates is the market pricing-in for MSFT?

In order to justify the current $3T market capitalization given a 8.0% cost of capital, MSFT needs to keep growing its un-levered free cash flows by 8.6% across many ( >10 ) years.

MSFT's market implied FCFF growth rate of 8.6% =
1 + (Enterprise Value * Cost of Capital - FCFF) / (Enterprise Value + FCFF) =
1 + ($3T * 8.0% - -$16B) / ($3T + -$16B)

By analyzing the relationship between EBIT growth and revenue growth, we get a scaling factor of 128.3% that we apply to our implied FCFF growth in order to get the market implied revenue growth rate of 11.0%

Margins

Gross
69.7%
2.2% YoY
EBIT
43.7%
6.6% YoY
Profit
36.3%
9.7% YoY
FCFF
-7.1%
-159.3% YoY
Why is MSFT scaling revenues by 5.3% relative to COGS?

MSFT grew revenue by 11.5% in the last 12 months, and their COGS changed by 6.2% in the same period. This means that the company is scaling revenues 5.3% better than costs.

A company that has a scaling rate above 1:1 indicates efficient growth that may translate into added value in the bottom line. Conversely, if the rate is lower, e.g. 1:0.9, it shows that while the company managed to grow, their costs increased more than revenues.

Free Cash Flows

Reinvestment
-$87B
FCFF
-$16B
FCFE
$10B
Net CapEx
-$85B
Simple FCFF
$67B
Change in WC
-$1.8B

Note: cash flows in the table and chart are presented as inflows and outflows, meaning that positive numbers indicate how much a company has taken in, and negatives show how much cash has flown out.

What is included in MSFT's $102B capital expenditures?

In the last 12 months MSFT invested $35B in plant property & equipment (PPE) CapEx. By adding the $67B in acquisition expenses, we get a total CapEx of $102B.

How much is MSFT reinvesting into the business?

In the last 12 months ending Q2'24, MSFT made capital expenditures of $102B. By netting out the depreciation of $17B, we get a NetCapEx of $85B, indicating that the company invested in future growth.

Finally, we add on the change in Working Capital of $1.8B, and get a Total Reinvestment of $87B.

By investing more than it depreciates, MSFT is increasing its future growth assets.

How are MSFT's -$16B free cash flows to the firm (FCFF) calculated? MSFT's -$16,075,000,000.00 Free Cash Flows to the Firm (FCFF) =
$99,362,000,000.00 EBIT
- $18,298,000,000.00 Tax
- $35,202,000,000.00 Plant Property Equipment
- $66,857,000,000.00 Acquisitions
+ $17,303,000,000.00 Depreciation
+ -$1,796,000,000.00 Change in Working Capital
- $10,216,000,000.00 Stock Based Compensation

Free Cash Flows to the Firm are important because they indicate how much a company has left over for all (debt & equity) investors.
It is a measure of the true bottom line for investors, as opposed to earnings and the simplified version of free cash flows (Cash from operating activities - PPE).

In the last 12 months MSFT had -$16B in free cash flows. This means that the company still needs to grow the business or cut costs.

How are MSFT's $10B free cash flows to equity investors (FCFE) calculated? MSFT's $10,094,000,000.00 Free Cash Flows to the Equity (FCFE) =
$82,541,000,000.00 Net Income
- $35,202,000,000.00 Plant Property Equipment
- $66,857,000,000.00 Acquisitions
+ $17,303,000,000.00 Depreciation
+ -$1,796,000,000.00 Change in Working Capital
+ $74,219,000,000.00 Total Debt today
- $60,114,000,000.00 Total Debt one year ago

Free Cash Flows to the Equity investors show how much the company has left over for shareholders.
It is an insightful metric when paired with FCFF for analyzing companies that have a lot of debt, as it can reveal the effect of interest rates on the value of equity.

When compared to FCFF, they should be roughly in-line, else we need to think about what causes the difference. In the last 12 months MSFT had $10B in free cash flows to equity, indicating that the business can return capital in the form of dividends and buybacks.

Returns

ROE
34.6%
ROIC
34.9%
Sales to Cap
98.3%
How much excess returns (value) is MSFT creating on average (27%), and how to calculate it?

ROE Excess Returns 26.5% = Return on Equity - Cost of Equity
ROC Excess Returns 26.8% = Return on Capital - Cost of Capital

Average Excess Returns = (ROE - Cost of Equity + ROIC - Cost of Capital) / 2

For every 1% of growth in its net and operating income, the value of MSFT's stock changes by an average of 0.27%.

Excess returns are important because they help us estimate a company's target price.

If you are analyzing a company with a lot of R&D expenses, consider capitalizing them as an asset to get a better ROE & ROC estimate - You can use our automated spreadsheet.

Capital Structure

Equity
$238B
Debt
$74B
Cash
$81B
Interest Coverage
41.2x
Debt to EBITDA
0.64x
Debt to Capital
2.4%

Dividends & Buybacks

Adj. Yield
1.0%
Dividends + Buybacks - SBC
FCFE Payout
302.8%
% FCFE paid as Div + Net Buybacks
R-R Upside
-91.7%
FCFE yld. / Cost of Equity - 1

Microsoft Corporation has transferred a total value of $31B to investors in the last 12 months. The required cash return (excluding expected growth) for MSFT is $116B, or a 3.8% yield in the same period.

With an adjusted payout of 302.8%, MSFT seems to be spending a potentially unsustainable amount of cash and may require financing if the financials don't improve.

SEC Filings

Examine the details and validate data:

Historical SEC Filings

Headlines