Image Source: Pixabay
 

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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