DCF Studio

    MSFT · NMS · Technology

    Microsoft Corporation

    Also onShortfallConsensus DriftCrosscheck

    Implied value per share

    USD 304.42

    Market price

    USD 493.78

    Implied upside

    -38.3%

    5-year forecast · Perpetuity growth terminal value · Mid-year discounting · Base case

    AdjustedCapital expenditure runs at 22.3% of revenue against depreciation of 9.3%. A perpetuity has to be a steady state, so the terminal year uses maintenance capex at depreciation and then charges the reinvestment terminal growth requires (g/ROIC of NOPAT). The bridge is shown under Terminal Value.

    Value Per Share

    Perpetuity growth
    USD 304.42-38.3%
    Exit multiple
    USD 664.48+34.6%
    Market price
    USD 493.78

    Same forecast, different terminal treatment. Percentages vs price.

    Forecast Cashflows

    Reporting currency (USD). Outflows negative.

    0bn77bn154bnFY27FY28FY29FY30FY31
    Nominal FCFFDiscounted to todayUSD
    LineFY27FY28FY29FY30FY31CAGR
    RevenueUSD 385.3bnUSD 447.5bnUSD 519.6bnUSD 603.4bnUSD 700.7bn+16.1%
    EBITUSD 172.3bnUSD 200.0bnUSD 232.3bnUSD 269.8bnUSD 313.3bn+16.1%
    NOPATUSD 140.2bnUSD 162.8bnUSD 189.1bnUSD 219.6bnUSD 255.0bn+16.1%
    Add depreciation & amortisationUSD 35.8bnUSD 41.6bnUSD 48.3bnUSD 56.0bnUSD 65.1bn+16.1%
    Less capital expenditureUSD -86.0bnUSD -99.9bnUSD -116.0bnUSD -134.7bnUSD -156.4bn+16.1%
    Less increase in working capitalUSD -5.2bnUSD -6.1bnUSD -7.0bnUSD -8.2bnUSD -9.5bn+16.1%
    Free cashflow to firmUSD 84.8bnUSD 98.5bnUSD 114.3bnUSD 132.8bnUSD 154.2bn+16.1%
    Discount factor0.95000.85750.77390.69850.6305-
    Present valueUSD 80.6bnUSD 84.4bnUSD 88.5bnUSD 92.7bnUSD 97.2bn+4.8%
    Present Value Of The ForecastUSD 443.4bn

    Discount Rate

    Source shown per component. All overridable above.

    Risk-free rate5.00%US 10-year Treasury (^TNX)
    Equity risk premium5.50%Market assumption
    Beta1.072Reported 1.108, pulled toward 1.0 (Blume)
    Cost of equity10.90%Risk-free + beta x equity risk premium
    Cost of debt5.20%Interest expense / average total debt
    Market capitalisationUSD 3666.6bn98.5% of capital
    Total debtUSD 56.8bn1.5% of capital, book value as a proxy
    Tax rate18.6%Effective, capped at statutory
    WACC10.79%E/V x Re + D/V x Rd x (1 - t)

    Terminal Value

    Perpetuity growth is intrinsic. The exit multiple defaults to the company's current EV/EBITDA, so it answers a different question - what the shares are worth if today's rating holds and EBITDA grows as forecast.

    Perpetuity growth at 2.50%

    Value per shareUSD 304.42

    80% of EV

    Forecast FCFF, final year
    USD 154.2bn
    Capex at depreciation, working capital in reinvestment
    USD 255.0bn
    Less reinvestment at g/ROIC (9.1% of NOPAT)
    USD -23.2bn
    Capitalised
    USD 231.7bn
    ROIC (reported)
    27.4%
    Terminal value, undiscounted
    USD 2863.9bn
    Terminal value, discounted
    USD 1805.6bn
    Enterprise value
    USD 2249.0bn
    Less net debt
    USD -19.8bn
    Equity value
    USD 2268.9bn

    Exit at 18.8x EBITDA

    Value per shareUSD 664.48

    91% of EV

    Terminal value, undiscounted
    USD 7120.2bn
    Terminal value, discounted
    USD 4489.1bn
    Enterprise value
    USD 4932.6bn
    Less net debt
    USD -19.8bn
    Equity value
    USD 4952.4bn

    Spread between methods: 74%.

    Sensitivity

    Value per share (USD) by discount rate and long-run growth.

    Long-run growth
    Discount rate1.50%2.00%2.50%3.00%3.50%
    8.79%373.03390.92411.58435.74464.37
    9.79%323.49336.17350.53366.95385.90
    10.79%284.83294.09304.43316.03329.17
    11.79%253.87260.79268.43276.88286.31
    12.79%228.55233.82239.58245.88252.83

    Outlined: this model. Green text: above today's price of 493.78. Shading: distance from this model's own value.

    Priced In

    What each input would have to be to justify the current price, one at a time.

    InputModelImpliedGap
    Revenue growth, every year16.1%29.1%+12.9pp
    EBIT margin44.7%69.6%+24.8pp
    Discount rate10.8%7.8%-3.0pp
    Download as Excel

    Live formulas, not pasted numbers - edit a driver and the workbook reprices.

    Yahoo Finance and RBA data. General information, not advice. Methodology.