$MSFT (Microsoft) - ๐๐ฎ๐น๐๐ฎ๐๐ถ๐ผ๐ป ๐บ๐ผ๐ฑ๐ฒ๐น
While the street fights over AI multiples, the actual math behind Microsoftโs intrinsic value reveals a "silent gap" that most of retail is completely ignoring. Today, I break down the specific DCF variables and share them with you below.
๐๐ฒ๐ ๐ฎ๐๐๐๐บ๐ฝ๐๐ถ๐ผ๐ป๐:
1. Explicit 5Y/5Y growth @ 14%/8.5%
2. Long-term growth in perpetuity @ 3%
3. Incremental margin expansion by 3% in Year 10.
4. WACC @ 9.4%.
5. Adj. EBITDA exit multiple of 16.8
6. Tax rate 18% - in line with historical average
7. The input that drives reinvestment is the most recent Sales to Capital ratio = 0.64, linearly regressed to the Software (System & Application) average rate of 1.79 in year 10.
๐๐ถ๐๐๐ผ๐ฟ๐ถ๐ฐ ๐๐ฟ๐ผ๐๐๐ต (๐ณ๐ผ๐ฟ ๐ฐ๐ผ๐ป๐๐ฒ๐ ๐)
Over the past decade, Microsoft has delivered one of the most consistently strong growth trajectories in mega-cap tech, driven primarily by the structural rise of cloud computing. Revenue has compounded at roughly low-to-mid double digits, powered by Azureโs explosive scale-up, steady expansion in Office 365 and Dynamics, and a revitalized ecosystem around Windows, Gaming, and now AI infrastructure. Operating income has grown even faster as the business shifted toward higher-margin cloud and subscription models, pushing Microsoftโs profitability, cash generation, and return metrics to historical highs. This combination of durable topline growth and expanding margins forms the baseline context for forward-looking assumptions in my DCF.
๐๐ฎ๐๐ฒ ๐ฐ๐ฎ๐๐ฒ
My intrinsic value for Microsoft is $ 528. Valuation suggests that the stock is trading at 29% discount to fair value. If adjusted to FV within 3 years, it will generate 12% in annual alpha. Here is why it can work out well:
* AI revenue ramps are still in the early innings
* Azure is taking disproportionate share of cloud growth
* Margin expansion is structurally underpriced
* Capex peak concerns are overdone
* Windows + Office + GitHub + LinkedIn ensure a locked-in ecosystem
* Gaming + Activision adds a second secular growth pillar
* Balance sheet strength can accelerate shareholder returns
* Regulatory environment is more favorable than feared
* Market still underappreciates the duration of Microsoftโs competitive moat
* AI productivity uplift could drive a multi-year enterprise IT spending cycle
๐๐ผ๐ป๐ฐ๐น๐๐๐ถ๐ผ๐ป
Bought a few shares at $ 364, representing 1.2% of the total portfolio. I like buying wonderful businesses below their intrinsic value.
Keep in mind that this is an estimate - just like any DCF model. Iโm not claiming perfection, but I do trust these calculations to guide my own investments. Hopefully, they can help inform yours as well.
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Disclaimer: This post is for informational and educational purposes only. I own shares in MSFT and can buy/sell them at any time after this post is published. Not financial advice. Do your own research.... Show More
Not investment advice. The author may have financial interests in the mentioned instruments.
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Tue May 19 2026 22:56:10 GMT+0000 (Coordinated Universal Time)
