Microsoft's Intrinsic Value Is Even Greater Than I Thought

I just received a great comment regarding my recent article on valuing Microsoft (MSFT). The reader noticed that I only used $9 billion in net cash to determine the intrinsic value of Microsoft shares. However, that $9 billion in net cash only included cash and equivalents. It did not include short-term investments, and Microsoft has a significant amount of short-term investments.

In fact, Microsoft’s balance sheet has over $22.7 billion in short-term investments listed in the most recent 10-Q. For the most part, those short-term investments are the equivalent of cash since they are primarily invested in fixed income securities that are investment grade and easily sold for cash. Taking these short-term investments into consideration, I really should have determined that net cash for Microsoft is currently $31.8 billion.

Using $31.8 billion in cash instead of $9.1 billion, my intrinsic value estimate rises to $27.39 per share versus my initial estimate of $25. I knew something was amiss with my original estimate, but I did not see the omission until I received the comment about net cash.

[Receiving comments on one’s investment analysis is one of the great benefits of posting research online for other to review and provide comment. I’m amazed at how often I receive insightful comments on my posts. Just look at the great discussion occurring on my original Microsoft Price Watch post. This is also one of the reason why I have shared my Fat Pitch Finder Spreadsheet.]

Full Disclosure: I own shares of Microsoft.

MSFT 1-yr chart:

Comments

[Ron Coleman]

Please tell me what your intrinsic value model looks like. Because I am curious how you went from $9 billion in cash to $31.8 billion in cash and your intrinsic value only increased by $2.39 to $27.39.

[George]

FeedTheBull Finance,
My valuation model for MSFT is based on my Fat Pitch Finder Spreadsheet. The increase in intrinsic value associated with the cash adjustment is simply the total change in cash divided by the diluted weighted average number of shares outstanding. $22.7 billion more in cash divided by 10.01 billion shares outstanding is a $2.27 increase in value per share. The original intrinsic value was rounded to $25, so there is some rounding error in the $2.39 change in intrinsic value you note in your comment.