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Microsoft Stock Valuation  07/21/2017

Summary

Microsoft, MSFT, is extremely efficient in producing free cash flow.

Its average (2012-2016-ttm) for CapEx/FCF = 0.22

The big question now: Is it a bargain?

See Bud Labitan at www.frips.com

Microsoft, MSFT, is extremely efficient in producing free cash flow. Its average (2012-2016-ttm) for CapEx/FCF = 0.22
The big question now: Is it a bargain?

Let's see what estimate you get for its estimated intrinsic value. Valuepro.net says 86 and Gurufocus says 36 at a 10.5% growth rate... for an average of $61. However, can it keep growing at that 10.6 rate?

My model for 10.5% growth: Starting with an estimate of annual Free Cash Flow of approximately $25,000,000,000 dollars and the number of shares outstanding at 7,720,514,000 shares; I used an assumed FCF annual growth of 10.5 percent for the first 10 years and assume zero growth from years 11 to 15. The estimated intrinsic value per share (discounted back to the present) is approximately $60.49.

Market Price = $73.80 Intrinsic Value = $60.49 (estimated) So, at first, my model says that it is selling at a 22% premium over intrinsic value.

However, something interesting happens when I add the dividends back into the free cash flow and imagine that it had not paid a dividend... then, I run my model at 10% growth.

Starting with an estimate of annual Free Cash Flow of approximately $35,415,000,000 dollars and the number of shares outstanding at 7,720,514,000 shares; I used an assumed FCF annual growth of 10 percent for the first 10 years and assume zero growth from years 11 to 15. The estimated intrinsic value per share (discounted back to the present) is approximately $82.94.

Market Price = $73.80 Intrinsic Value = $82.94 (estimated) This results in a Price To Value (P/V) ratio = .89 and the estimated bargain = 11.02 percent.

In this scenario, MSFT might actually be fairly priced or a mild bargain of 11%. Knowing that tech stocks can fluctuate in market price a lot, MSFT might be attractive to the investor who has faith in Microsoft's efficient business model, and who can hold for 10 years or more.

Feel free to send me your comments in a private FB message.

Disclosure: I am/we are long MSFT.