The Microsoft Corp (MSFT) DCF Valuation: Is The Stock Undervalued?

Johnny HopkinsStock ScreenerLeave a Comment

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%.

MSFT Chart

MSFT data by YCharts

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.

For all the latest news and podcasts, join our free newsletter here.

FREE Stock Screener

Don’t forget to check out our FREE Large Cap 1000 – Stock Screener, here at The Acquirer’s Multiple:

unlimited

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.