As part of a new series, each week we typically conduct a DCF on one of the companies in our screens. This week we thought we’d take a look at one of the stocks that are not currently in our screens, Microsoft Corp (MSFT).
Profile
Microsoft develops and licenses consumer and enterprise software. It is known for its Windows operating systems and Office productivity suite. The company is organized into three equally sized broad segments: productivity and business processes (legacy Microsoft Office, cloud-based Office 365, Exchange, SharePoint, Skype, LinkedIn, Dynamics), intelligence cloud (infrastructure- and platform-as-a-service offerings Azure, Windows Server OS, SQL Server), and more personal computing (Windows Client, Xbox, Bing search, display advertising, and Surface laptops, tablets, and desktops).
Recent Performance
Over the past twelve months the share price is up 57.59%.
Inputs
- Discount Rate: 8.30%
- Terminal Growth Rate: 2%
- WACC: 8.30%
Forecasted Free Cash Flows (FCFs)
| Year | FCF (billions) | PV(billions) |
| 2024 | 76 | 70.18 |
| 2025 | 87 | 74.18 |
| 2026 | 99 | 77.94 |
| 2027 | 112 | 81.41 |
| 2028 | 127 | 85.24 |
Terminal Value
Terminal Value = FCF * (1 + g) / (r – g) = 2056.19 billion
Present Value of Terminal Value
PV of Terminal Value = Terminal Value / (1 + WACC)^5 = 1380.13 billion
Present Value of Free Cash Flows
Present Value of FCFs = ∑ (FCF / (1 + r)^n) = 388.95 billion
Enterprise Value
Enterprise Value = Present Value of FCFs + Present Value of Terminal Value = 1769.08 billion
Net Debt
Net Debt = Total Debt – Total Cash = 12.54 billion
Equity Value
Equity Value = Enterprise Value – Net Debt = 1756.54 billion
Per-Share DCF Value
Per-Share DCF Value = Enterprise Value / Number of Shares Outstanding = $236.44
Conclusion
| DCF Value | Current Price | Margin of Safety |
|---|---|---|
| $236.44 | $378.74 | -60.18% |
Based on the DCF valuation, the stock is overvalued. The DCF value of $236.44 per share is lower than the current market price of $378.74. The Margin of Safety is -60.18%%.
It is important to note that this valuation is based on a number of assumptions, and these assumptions could change in the future. This valuation is meant to be a back-of-the-envelope analyse that could be used as a starting point in a much more thorough valuation process. As a result, it is important to do your own research before making any investment decision.
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