As part of our ongoing 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 world’s most dominant technology companies, Microsoft (MSFT).
Profile
Microsoft Corporation (MSFT) is one of the largest and most influential technology companies in the world. Its business spans software, cloud computing, productivity tools, AI, gaming, and enterprise solutions. With products like Windows, Azure, Office 365, GitHub, and LinkedIn, Microsoft maintains a wide economic moat and consistently generates robust free cash flow. The company’s recurring revenue model, massive scale, and cloud dominance make it a cornerstone holding for many long-term investors.
DCF Analysis
Inputs
Discount Rate: 8.0%
Terminal Growth Rate: 2.5%
WACC: 7.5%
Forecasted Free Cash Flows (FCFs) in billions
Year: 2025 | FCF: 75 | Present Value: 69.44
Year: 2026 | FCF: 82 | Present Value: 70.76
Year: 2027 | FCF: 89 | Present Value: 71.80
Year: 2028 | FCF: 97 | Present Value: 73.03
Year: 2029 | FCF: 105 | Present Value: 74.01
Total Present Value of FCFs = 359.04 billion
Terminal Value Calculation
Using the perpetuity growth model:
Terminal Value = (105 × 1.025) / (0.08 – 0.025)
Terminal Value = 107.625 / 0.055 = 1,956.82 billion
Present Value of Terminal Value
PV of Terminal Value = 1,956.82 / (1.08^5)
PV of Terminal Value = 1,956.82 / 1.4693 = 1,331.67 billion
Enterprise Value Calculation
Enterprise Value = Present Value of FCFs + Present Value of Terminal Value
Enterprise Value = 359.04 + 1,331.67 = 1,690.71 billion
Net Debt Calculation
Net Debt = Total Debt – Cash
Net Debt = 67 – 75 = -8.00 billion (net cash)
Equity Value Calculation
Equity Value = Enterprise Value – Net Debt
Equity Value = 1,690.71 + 8.00 = 1,698.71 billion
Per-Share DCF Value
Shares Outstanding = 7.43 billion
Per-Share DCF Value = 1,698.71 / 7.43 = 228.64
Conclusion
DCF Value: $228.64
Current Price: $452.27
Margin of Safety: -49.5%
Based on the DCF valuation, Microsoft appears significantly overvalued. The estimated intrinsic value of $228.64 per share is well below the current market price of $452.27, resulting in a negative margin of safety of -49.5%.
Investors should consider whether the stock’s premium reflects justified long-term dominance and future growth — or whether it leaves little room for error if future cash flows disappoint.
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