Microsoft Corporation (MSFT)

Discount cash flow analysis

Sell Overvalued by 45.7%

5% margin of safety What's this?

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How does this work?

This is an interactive analyst report for Microsoft Corporation, based on a discounted cash flow valuation approach.

You can modify the assumptions and the valuation will be updated automatically. You can also save and share your valuation.

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Values in $ millions
2008 2009 2010 2011 2012 2013 2014 2015
 
                 
               
 

What will the revenues be in the future?

Growth beyond year three is driven by the terminal growth rate.

Sensitivity matrix

   
-1%
Discount Rate %
0%

1%
  -1% $31.14 $30.76 $30.38
Terminal Growth% 0 $31.25 $30.86 $30.49
  +1% $31.36 $30.97 $30.59

How does a change in discount rate or terminal growth affect valuation?

This table shows the sensitivity of the valuation to two key variables - the discount rate and the terminal growth rate

Valuations and comments

  • Valuecruncher created a new valuation of $45.85 (overvalued by 19.29%) - 1 year ago
  • acrouse created a new valuation of $57.76 (undervalued by 50.22%) - almost 4 years ago
  • TravisEz13 created a new valuation of $39.99 (undervalued by 17.83%) - 4 years ago
  • TravisEz13 created a new valuation of $35.65 (undervalued by 27.55%) - over 4 years ago
  • mgood created a new valuation of $40.70 (undervalued by 33.05%) - 5 years ago
  • beatsj8 created a new valuation of $32.87 (undervalued by 27.35%) - almost 6 years ago
  • bency123 created a new valuation of $31.14 (undervalued by 26.95%) - almost 6 years ago
  • gsteens created a new valuation of $26.32 (overvalued by 8.55%) - over 6 years ago
  • PARKERTG created a new valuation of $31.72 (undervalued by 25.77%) - almost 7 years ago
  • PARKERTG created a new valuation of $31.72 (undervalued by 25.77%) - almost 7 years ago
  • JMILOSAK created a new valuation of $33.01 (undervalued by 14.74%) - over 7 years ago
  • ankallissankari created a new valuation of $28.80 (undervalued by 1.59%) - over 7 years ago
  • lausan created a new valuation of $31.53 (undervalued by 13.25%) - over 7 years ago
  • clp1001 created a new valuation of $31.00 (undervalued by 0.13%) - over 7 years ago
  • jfachl01 created a new valuation of $31.42 (undervalued by 4.8%) - almost 8 years ago
  • Maela created a new valuation of $30.89 (undervalued by 4.29%) - almost 8 years ago
  • Maela created a new valuation of $30.89 (undervalued by 4.29%) - almost 8 years ago
  • smdet created a new valuation of $39.47 (undervalued by 42.34%) - almost 8 years ago
  • smdet created a new valuation of $28.84 (undervalued by 4.0%) - almost 8 years ago
  • smdet created a new valuation of $39.49 (undervalued by 42.41%) - almost 8 years ago
  • tweakie created a new valuation of $42.81 (undervalued by 64.91%) - almost 8 years ago
  • carswelli created a new valuation of $34.93 (undervalued by 48.26%) - 8 years ago
  • mindracer created a new valuation of $29.77 (undervalued by 26.95%) - 8 years ago
  • GordonGekko created a new valuation of $29.43 (undervalued by 19.98%) - 8 years ago
  • GordonGekko created a new valuation of $27.61 (undervalued by 13.67%) - 8 years ago
  • woyeyele created a new valuation of $19.98 (overvalued by 10.76%) - 8 years ago
  • babsle16 created a new valuation of $23.76 (undervalued by 7.32%) - over 8 years ago
  • GordonGekko created a new valuation of $23.15 (undervalued by 22.03%) - over 8 years ago
  • swampler created a new valuation of $21.71 (undervalued by 10.37%) - over 8 years ago
  • SethWellbourne created a new valuation of $21.68 (undervalued by 24.03%) - over 8 years ago
  • savov created a new valuation of $22.46 (undervalued by 22.53%) - over 8 years ago
  • savov created a new valuation of $22.46 (undervalued by 22.53%) - over 8 years ago
  • savov created a new valuation of $23.09 (undervalued by 25.97%) - over 8 years ago
  • rileyj98 created a new valuation of $25.50 (undervalued by 49.47%) - over 8 years ago
  • afi created a new valuation of $25.48 (undervalued by 53.03%) - over 8 years ago
  • balli created a new valuation of $25.47 (undervalued by 68.12%) - over 8 years ago
  • thecatpreacher created a new valuation of $25.47 (undervalued by 68.12%) - over 8 years ago
  • rs12345 created a new valuation of $15.23 (overvalued by 0.26%) - over 8 years ago
  • rs12345 created a new valuation of $15.34 (undervalued by 0.46%) - over 8 years ago
  • rs12345 created a new valuation of $12.79 (overvalued by 16.24%) - over 8 years ago
  • rs12345 created a new valuation of $15.23 (overvalued by 0.26%) - over 8 years ago
  • freecashsurfing created a new valuation of $27.14 (undervalued by 37.7%) - over 8 years ago
  • GordonGekko created a new valuation of $25.34 (undervalued by 32.46%) - over 8 years ago
  • GordonGekko created a new valuation of $25.79 (undervalued by 25.19%) - almost 9 years ago
  • GordonGekko created a new valuation of $25.26 (undervalued by 27.13%) - almost 9 years ago
  • sridhariyer27 created a new valuation of $24.16 (undervalued by 6.81%) - almost 9 years ago
  • GordonGekko created a new valuation of $30.86 (undervalued by 40.53%) - almost 9 years ago
  • TheCrunchBlog created a new valuation of $30.86 (undervalued by 25.6%) - 9 years ago
  • GordonGekko created a new valuation of $32.67 (undervalued by 18.28%) - 9 years ago
  • GordonGekko created a new valuation of $31.85 (undervalued by 14.16%) - 9 years ago
  • andrew created a new valuation of $23.54 (overvalued by 22.62%) - over 9 years ago
  • lancewiggs created a new valuation of $16.30 (overvalued by 45.36%) - over 9 years ago
  • KiwiEMH created a new valuation of $30.46 (undervalued by 1.77%) - over 9 years ago
  • acoy created a new valuation of $25.84 (overvalued by 15.14%) - over 9 years ago
  • GordonGekko created a new valuation of $28.82 (undervalued by 6.27%) - over 9 years ago
  • contrarian created a new valuation of $32.81 (undervalued by 7.75%) - over 9 years ago
  • KiwiEMH created a new valuation of $34.73 (undervalued by 25.15%) - over 9 years ago
  • matrixxx created a new valuation of $32.50 (undervalued by 18.14%) - over 9 years ago
  • GordonGekko created a new valuation of $31.17 (undervalued by 13.3%) - over 9 years ago
  • TheCrunchBlog created a new valuation of $33.01 (undervalued by 19.99%) - over 9 years ago
  • KiwiEMH created a new valuation of $27.29 (undervalued by 1.0%) - over 9 years ago
  • Ashkat created a new valuation of $46.69 (undervalued by 71.09%) - over 9 years ago
  • KiwiEMH created a new valuation of $27.21 (overvalued by 0.29%) - over 9 years ago
  • jeremy created a new valuation of $35.04 (undervalued by 15.19%) - over 9 years ago

Comments

Running The Numbers – A Five-Minute Valuation Of Microsoft

This valuation is part of this blog post:

http://blog.valuecruncher.com/2008/09/running-the-numbers-a-five-minute-valuation-of-microsoft/

Profitability

The profitability tab covers the company’s anticipated revenues and profitability (at the EBITDA level). The starting numbers in the default valuation are based on estimates of the company’s prospects moving forward. To complete a high-level valuation of MSFT we round the revenues to three significant figures – US$67.5 billion in 2009, US$74.5 billion in 2010 and US$79.4 billion in 2011. We have used a flat EBITDA margin of 40% to 2011.

Key Valuation Assumptions

Discount Rate – reflects the required rate of return on an investment. The discount rate consists of two key components, the time value of money and risk. The discount rate used in the Valuecruncher valuation is the nominal post-tax weighted average cost of capital (WACC). The higher the discount rate the more variable (greater risk) the cash flows generated by the company. For US companies we would expect to see discount rates in the 8-12% range – 8% being stable utility style businesses and 12+% being riskier technology-based companies. For MSFT we have used a 10% discount rate.

Terminal Growth Rate – is an approximation of the growth rate beyond the next three years into perpetuity (i.e. forever) of the company’s cash flows. The company’s growth rate will fluctuate with economic and industry cycles with the terminal growth rate representing an average growth rate. The long-run expectation for economy wide growth is approximately 2-3% (nominal). We have a blog post with a table showing how to estimate terminal growth. But the place to start is 2-3% + a factor for near term growth. We have completed a valuation for Google (GOOG) that used a 6.5% terminal growth estimate – that is pretty high. You would expect to typically see terminal growth in a 2-4% range. For MSFT we have used 3%.

Tax – The tax rate entered is used to calculate the tax payable for the first three years. Beyond that the marginal tax rate of the country of domicile is used. For MSFT we have used 35%.

Capital Expenditure / Depreciation

How much does the company have to spend to generate the revenues and profits for the business? Capital expenditure is a cost that is not included in the revenue or EBITDA margin assumptions. This covers: the acquisition or disposal of operating assets, research and development costs not included in the EBITDA margin and changes in net working capital. The terminal capital expenditure represents an estimate of the ongoing investment required to facilitate the forecast long term growth. The terminal capital expenditure value should be viewed as a simplified estimate of a more complex series of expenses. For MSFT we have assumed capital expenditure of US$3.25 billion in 2009, US$3.75 billion in 2010 and 2011 then terminal capital expenditure of US$4.0 billion. We have assumed depreciation of US$2.75 billion in 2009, US$3.0 billion in 2010 and US$3.25 billion in 2011.

By TheCrunchBlog, about 9 years ago

The boring details

All amounts in millions Figures
Enterprise Value: 495,029
Net Debt (Long-term borrowings less cash): -23,662
Equity Value: 224,331
Number of Shares Outstanding: 9,130,000,000
Calculated value per share: $30.86

Enterprise Value is the present value of the post-tax cash flows for a business into the future.


Calcuation of EV

Where:

  • C1, C2, C3 - the cash flow in period 1, 2, 3, ...
  • r - the discount rate

To capture the cash flows into the future a terminal value is calculated via a perpetuity calculation -
based on the final years forecast post-tax free cash flow.


Perpetuity

Where:

  • Cn - the cash flow in the final forecast period.
  • LTG - the long-term growth rate
  • r - the discount rate
  • g - the terminal growth rate

The Capital Asset Pricing Model (CAPM) is used to determine the equity component in the discount rate.


CAPM model

Where:

  • rt - the risk free rate
  • t - the tax rate
  • B - the beta of the company
  • MRP - the Market Risk Premium

Valuecruncher uses an estimate of Weighted Average Cost of Capital (WACC) to determine the discount rate in the calculation.