Is Microsoft undervalued based on future cash flows and its price relative to the stock market?
Value is all about what a company is worth versus what price it is available for. If you went into a grocery store and all the bananas were on sale at half price, they could be considered undervalued.
INTRINSIC VALUE BASED ON FUTURE CASH FLOWS
Here we compare the current
share price of Microsoft to its discounted cash flow value.
The discounted cash flow value is simply looking at what the company is worth today, based on estimates of how much money it is expected to make in the future.
How is this discounted cash flow calculated?
- The current share price of Microsoft is above its future cash flow value.
Often investors are willing to pay a premium for a company that has a high dividend or the potential for future growth.
We assess Microsoft's value by looking at:
- Is the discounted cash flow value less than 20%, or 40% of the share price? (2 checks) (Click here or on bar chart for details of DCF calculation.)
- Is the PE ratio less than the market average, and/ or less than the Software industry average (and greater than 0)? (2 checks)
- Is the PEG ratio within a reasonable range (0 to 1)? (1 check)
- Is the PB ratio less than the Software industry average (and greater than 0)? (1 check)
Microsoft has a total score of 1/6, see the detailed checks below.
Note: We use GAAP Earnings per Share in all our calculations including PE and PEG Ratio.
Note 2: PEG ratio is based on analysts EPS growth expectations in 1 year (12.78%).
Full details on the Value part of the Simply Wall St company analysis model.
Discounted cash flow (Free cash flow to Equity)
The calculations below outline how an intrinsic value for Microsoft is arrived at by discounting future cash flows to their present value. We use analyst's estimates of cash flows going forward 5 years.
5 year cash flow forecast
See our documentation to learn about this calculation.
|Levered FCF (USD, Millions)
Discounted (@ 10.8%)
Present value of next 5 years cash flows:
Terminal Value = FCF2021 × (1 + g) ÷ (Discount Rate – g)
Terminal Value = $31,628 × (1 + 2.3%) ÷ (10.82% – 2.3%)
Terminal value based on the Perpetuity Method where growth (g) = 2.3%:
Present value of terminal value:
Equity Value (Total value) = Present value of next 5 years cash flows + terminal value
Value = Total value / Shares Outstanding ($345,009 / 7,702)
Value per share:
Current discount (share price of $74.94): -67%
Estimate of Discount Rate
The discount rate, or required rate of return, is estimated by calculating the Cost of Equity.
Discount rate = Cost of Equity = Risk Free Rate + (Levered Beta * Equity Risk Premium)
Discount rate = 10.82% = 2.33% + (1.107 * 7.67%)
Estimate of Bottom Up Beta
The Levered Beta is the Unlevered Beta adjusted for financial leverage. It is limited to 0.8 to 2.0 (practical range for a stable firm).
Levered Beta = Unlevered beta (1 + (1- tax rate) (Debt/Equity))
1.107 = 0.999 (1 + (1- 30%) (15.39%))
Levered Beta used in calculation = 1.107
- The risk free rate of 2.33% is from the 10 year government bond rate in US.
- The bottom-up beta is estimated by analysing other companies in the same industry.
- The Equity Risk Premium is calculated by subtracting the risk free rate from the market return premium (10%) (source: Buffet).
- The dividend discount model is automatically used for companies in the following industries: Banks, Insurance, Real Estate Investment Trusts (REITs), Diversified Financial Services and Capital Markets.
How is Microsoft expected to perform in the next 1 to 3 years based on estimates from 27 analysts?
The future performance of a company is measured in the same way as past performance, by looking at estimated growth and how much profit it is expected to make.
Future estimates come from professional analysts. Just like forecasting the weather, they don’t always get it right!
Expected earnings growth over 3 years.
Future Earnings growth analysis
Is Microsoft expected to grow at an attractive rate? We look at the 1 year and 3 year growth below.
Are Microsoft's annual earnings growth expected to exceed 3.4% over the next 3 years?
- After 1 year
- After 3 years
1 & 3 year estimated growth in earnings
Past and Future Earnings per Share
The accuracy of the analysts who estimate the future performance data can be gauged below. We look back 3 years and see if they were any good at predicting what actually occured. We also show the highest and lowest estimates looking forward to see if there is a wide range.
Analysts growth expectations
2 year growth check
Which of the these is expected to increase by over 50% in 2 year's time?
Performance in 3 years
In the same way as past performance we look at the future estimated return (profit) compared to the available funds. We do this looking forward 3 years.
- Microsoft is expected to perform strongly, Return on Equity (ROE) in 3 years is estimated to be above 20%.
Improvement & Relative to industry
- Expected to be above the Software industry average.
- A decline in Microsoft's performance (ROE) is expected over the next 3 years.
Future performance checks
We assess Microsoft's future performance by looking at:
- Is the growth in earnings expected to beat the low risk savings rate, plus a premium to keep pace with inflation, in 1 year and 3 years? (2 checks)
- Does the average analyst expect Revenue to increase by 50% or more in 2 years? (1 check)
- Does the average analyst expect Operating Cash Flow to increase by 50% or more in 2 years? (1 check)
- Does the average analyst expect Net Income (Profit) to increase by 50% or more in 2 years? (1 check)
- Is the Return on Equity in 3 years expected to be over 20%? (1 check)
Some of the above checks will fail if the company is expected to be loss making in the relevant year.
Microsoft has a total score of 3/6, see the detailed checks below.
Note: If no +3 year data is available, +2.5 year data may be used.
Note 2: We use GAAP per Share in all our calculations.
Full details on the Future part of the Simply Wall St company analysis model.
How has Microsoft performed over the past 5 years?
The past performance of a company can be measured by how much growth it has experienced and how much profit it makes relative to the funds and assets it has available.
Past earnings growth
Below we compare Microsoft's growth in the last year to its industry (Software).
Past Earnings growth analysis
We also check if the company has grown in the past 5 years, and whether it has maintained that growth in the year.
- Microsoft's earnings growth has exceeded the industry average over the past year.
- Microsoft's 1 year earnings growth exceeds its 5 year annual average (29.2% vs -3.5%).
- Microsoft has improved earnings in the past 5 years.
Microsoft's revenue and profit over the past 5 years is shown below, any years where they have experienced a loss will show up in red.
Performance last year
We want to ensure a company is making the most of what it has available. This is done by comparing the return (profit) to a company's available funds, assets and capital.
- Strong return on shareholders funds (ROE) last year.
- Microsoft performed worse than the Software industry average based on return on assets (ROA) last year.
- Performance based on revenue producing assets (ROCE) has been diminishing over 3 years.
Past performance checks
We assess Microsoft's performance over the past 5 years by checking for:
- Has earnings per share (EPS) increased in past 5 years? (1 check)
- Has the EPS growth in the last year exceeded that of the Software industry? (1 check)
- Is the current EPS growth higher than the average annual growth over the past 5 years? (1 check)
- Is the Return on Equity (ROE) higher than 20%? (1 check)
- Is the Return on Assets (ROA) above industry average? (1 check)
- Has the Return on Capital Employed (ROCE) increased from 3 years ago? (1 check)
The above checks will fail if the company has reported a loss in the most recent earnings report. Some checks require at least 3 or 5 years worth of data.
Microsoft has a total score of 4/6, see the detailed checks below.
Note: We use GAAP Earnings per Share in all our calculations.
Full details on the Past part of the Simply Wall St company analysis model.
How is Microsoft's financial health and their level of debt?
A company's financial position is much like your own financial position, it includes everything you own (assets) and owe (liabilities).
The boxes below represent the relative size of what makes up Microsoft's finances.
The net worth of a company is the difference between its assets and liabilities.
- Microsoft is able to meet its short term (1 year) commitments with its holdings of cash and other short term assets.
- Microsoft's cash and other short term assets cover its long term commitments.
This treemap shows a more detailed breakdown of Microsoft's finances.
If any of them are yellow this indicates they may be out of proportion and red means they relate to one of the checks below.
Liabilities and shares
The 'shares' portion represents any funds contributed by the owners (shareholders) and any profits.
- Low level of unsold assets
- Total debt is covered by short term assets.
Nearly all companies have debt. Debt in itself isn’t bad, however if the debt is too high, or the company can’t afford to pay the interest on its debts this may have impacts in the future.
The graphic below shows equity (available funds) and debt, we ideally want to see the red area (debt) decreasing.
If there is any debt we look at the companies capability to repay it, and whether the level has increased over the past 5 years.
- The level of debt (123%) compared to net worth is high (greater 40%).
- The level of debt compared to net worth has increased over the past 5 years (19% vs 123% today).
- Total debt is well covered by annual operating cash flow (greater than 20% of total debt).
- Interest on debt is well covered by earnings (27.1x coverage).
Financial health checks
We assess Microsoft's financial health by checking for:
Full details on the Health part of the Simply Wall St company analysis model.
- Are short term assets greater than short term liabilities? (1 check)
- Are short term assets greater than long term liabilities? (1 check)
- Has the debt to equity ratio increased in the past 5 years? (1 check)
- Is the debt to equity ratio over 40%? (1 check)
- Is the debt covered by short term assets? (1 check)
- Are earnings greater than 5x the interest on debt (if comapany pays interest at all)? (1 check)
Microsoft has a total score of 4/6, see the detailed checks below.
What is Microsoft's current dividend yield, its reliability and sustainability?
Dividends are regular cash payments to you from the company, similar to a bank paying you interest on a savings account.
Annual Dividend Income
Current annual income from Microsoft dividends. Estimated to be 2.45% next year.
If you bought $2,000 of Microsoft shares you are expected to receive $42 in your first year as a dividend.
Here we look how much dividend is being paid, if any. Is it above what you can get in a savings account?
It is up there with the best dividend paying companies?
- Paying below low risk savings rate. (2.25%)
- Paying below the markets top dividend payers. (3.18%)
Upcoming dividend payment
Purchase Microsoft on or before the 'Buy Limit' to receive their next dividend payment.
Dividends are usually paid every 3 or 6 months, you can time your share purchase to take advantage of upcoming dividend payments.
Historical dividend yield
It is important to see if the dividend for a company is stable, and not wildly increasing/decreasing each year. This graph shows you the historical rate to count toward your assessment of the stock.
We also check to see if the dividend has increased in the past 10 years.
- Dividends per share have been stable in the past 10 years.
- Dividends per share have increased over the past 10 years.
Current Payout to shareholders
What portion of Microsoft's earnings are paid to the shareholders as a dividend.
- Dividends paid are covered by net profit (1.8x coverage).
Future Payout to shareholders
- Dividends after 3 years are expected to be well covered by net profit (2.2x coverage).
Income/ dividend checks
We assess Microsoft's dividend by checking for:
Full details on the Dividends part of the Simply Wall St company analysis model.
- Firstly is the company paying a notable dividend (greater than 0.5%) - if not then the rest of the checks are ignored.
- Current dividend yield, is there one at all, is it higher than the low risk savings rate, and is it above the top 25% of dividend payers? (2 checks)
- Have they paid a dividend for 10 years, and during this period has the dividend been volatile (drop of more than 25%)? (1 check)
- If they have paid a dividend for 10 years has it increased in this time? (1 check)
- How sustainable is the dividend, can Microsoft afford to pay it from its earnings today and in 3 years (Payout ratio less than 90%)? (2 checks)
Microsoft has a total score of 4/6, see the detailed checks below.
What is the CEO of Microsoft's salary, the management and board of directors tenure and is there insider trading?
Management is one of the most important areas of a company. We look at unreasonable CEO compensation, how long the team and board of directors have been around for and insider trading.
Mr. Satya Nadella has been the Chief Executive Officer of Microsoft Corporation since February 4, 2014. Mr. Nadella joined Microsoft in 1992 and served leadership roles in both enterprise and consumer businesses across Microsoft for over 22 years. He served as Executive Vice President of Cloud & and Enterprise Engineering Group at Microsoft Corporation until February 4, 2014 and President of Server & Tools since February 9, 2011 until February 4, 2014. He led the transformation to the cloud infrastructure and services business, which outperformed the market and took share from competition. Mr. Nadella and his team delivered the “Cloud OS”, Microsoft’s next generation backend platform. He served as Senior Vice President of Research & Development for the Online Services Division at Microsoft Corporation until February 9, 2011. Mr. Nadella led Microsoft's engineering efforts in the Online Services Division, which includes the Search (Live Search), Portal (MSN) and Advertising platforms. He served as the Head of Dynamics Business Software Development at Microsoft Corporation and also served as its Corporate Vice President of Microsoft Business Solutions (MBS) and Search & Advertising Platform Group. Mr. Nadella became part of Business Solutions when the division was formed by combining the bCentral, Great Plains and Navision a/s groups. During his six years in MBS, he was responsible for Microsoft Dynamics ERP and the creation of Microsoft Dynamics CRM and Microsoft Office Small Business product lines. Before that, he served as General Manager for the Commerce Platforms Group and led the development efforts for Microsoft Commerce Server and Microsoft BizTalk Server. He was also a key member of several advanced technology incubation efforts inside Microsoft, including interactive television (ITV) and digital rights management (DRM). His first assignment at Microsoft Corporation was in the Windows Developer Relations group, where he was a Program Manager. Prior to Microsoft, Mr. Nadella served as a Member of the technology staff at Sun Microsystems Inc. He has been a Trustee of Fred Hutchinson Cancer Research Center since July 11, 2016. He has been a Non-Independent Director of Microsoft Corporation since February 4, 2014. He serves as a Director of BravoSolution US, Inc. He has been a Director of Starbucks Corporation since March 22, 2017. He served as a Director of Riverbed Technology, Inc. from March 1, 2013 to February 2014. He served as a Director of Intelliprep Technologies Inc. Mr. Nadella earned a Bachelor's degree in Electrical Engineering from Mangalore University, a Master's degree in Computer Science from the University of Wisconsin, Milwaukee and a Master’s degree in Business Administration from the University of Chicago.
- CEO's compensation has been consistent with company performance over the past year.
- CEO's compensation appears reasonable.
Management Team Tenure
Average tenure of the Microsoft management team:
- The average tenure for the Microsoft management team is over 5 years, this suggests they are a seasoned and experienced team.
CEO & Non-Independent Director
Executive VP & CFO
Executive Vice President of Business Development
Executive VP and President of Microsoft Global Sales
Board of Directors Tenure
Average tenure of the Microsoft board of directors:
- The average tenure for the Microsoft board of directors is over 10 years, this suggests they are a seasoned and experienced board.
Board of Directors
CEO & Non-Independent Director
Recent Insider Trading
- Microsoft insiders have sold more shares than they have bought in the past 3 months.
Who owns this company?
We assess Microsoft's management by checking for:
- Is the CEO's compensation unreasonable compared to market cap and profit (greater than 0.5% of the company's profit + 0.03% of market cap)? (1 check)
- Has the CEO's compensation increased more than 20% whilst the EPS is down more then 20%? (1 check)
- Is the average tenure of the management team less than 2 years? (1 check)
- Is the average tenure of the board of directors team less than 3 years? (1 check)
Microsoft has a total score of 6/6, this is not included on the snowflake, see the detailed checks below.
Note: We use the top 6 management executives and board members in our calculations.
Note 2: Insider trading include any internal stakeholders and these transactions
Full details on the Management part of the Simply Wall St company analysis model.
Microsoft Corporation develops, licenses, and supports software products, services, and devices worldwide. The company’s Productivity and Business Processes segment offers Office 365 commercial products and services for businesses, including Office, Exchange, SharePoint, Skype for Business, and related Client Access Licenses (CALs); Office 365 consumer services, such as Skype, Outlook.com, and OneDrive; Dynamics business solutions, such as financial management, enterprise resource planning, customer relationship management, supply chain management, and analytics applications for small and mid-size businesses, large organizations, and divisions of enterprises; and LinkedIn online professional network. Its Intelligent Cloud segment licenses server products and cloud services, such as Microsoft SQL Server, Windows Server, Visual Studio, System Center, and related CALs, as well as Azure, a cloud platform with computing, networking, storage, database, and management services; and enterprise services, such as Premier Support and Microsoft Consulting that assist in developing, deploying, and managing Microsoft server and desktop solutions, as well as provide training and certification to developers and IT professionals on Microsoft products. The company’s More Personal Computing segment comprises Windows OEM, volume, and other non-volume licensing of the Windows operating system; patent licensing, Windows Internet of Things, MSN display advertising, and Windows Phone licensing system; devices, including Microsoft Surface, phones, and PC accessories; and search advertising, including Bing and Bing Ads. This segment also provides gaming platforms, including Xbox hardware, Xbox Live, video games, and third-party video games. The company markets and distributes its products through original equipment manufacturers, distributors, and resellers, as well as through online and Microsoft retail stores. The company was founded in 1975 and is headquartered in Redmond, Washington.
|Market Cap:||$577,206 million|
One Microsoft Way, Redmond, 98052, United States
|Sector:||Software and Services|