Microsoft Corp. (MSFT) is the largest independent maker of software. It develops and sells software products for a wide range of computing environments in consumer and enterprise markets. Microsoft’s hardware products include the Xbox video game console and Surface laptops. Microsfot’s revenue sources in fiscal 2020 were: Productivity & Business Processes, 32%; Intelligent Cloud, 34%; More Personal Computing, 34%. This week, I fundamentally analyze Microsoft’s stock. I review MSFT’s operating segments, look at its key ratios, derive the intrinsic value using Discounted Cash Flow (DCF) analysis, and calculate the expected rate of return from this investment. Since this is a long video, please feel free to use the time stamps in the video if you only wish to watch certain topics.
I review various key ratios such as Revenue, Net Income, Shares outstanding, Dividends, Payout Ratio, Free Cash Flows (FCF), Financial Leverage, Current Ratio, Debt to Equity Ratio, Return on Equity (ROE), Days Sales Outstanding (DSO), Days Inventory, Payable Period, Cash Conversion Cycle, Inventory Turnover, etc.
After taking into account 2020’s free cash flow of $45,234 million figure, a 12% growth rate of FCF (growth for the next 10 years), 10% discount rate, 5% long term growth rate (growth from 10 year mark to perpetuity), 7,646 million shares outstanding, and $59,578 million of long term debt, the DCF analysis yields us an intrinsic value of $209 per share. If we drop the discount rate from 10% to 9%, the intrinsic value comes to $270 per share. Using the current stock price of about $258.50 per share, and taking into the shares outstanding and future projects of free cash flows, we get the annual expected rate of return to be 2.5% if we hold this security through 2075.
0:35 Business Segments / Business Overview
3:35 Key Ratios Analysis
14:18 Discounted Cash Flow Analysis / Intrinsic Value
16:37 Expected Rate of Return Calculation
17:46 Summary / Conclusion
Microsoft’s Website: here
Morningstar Key Ratios Link: here.
Useful Resources here.
Microsoft Corporation is an American multinational technology company with headquarters in Redmond, Washington. It develops, manufactures, licenses, supports, and sells computer software, consumer electronics, personal computers, and related services.
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