An Exploration into Its Intrinsic Value | Windows

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In this article, we will take a look into Microsoft Corp’s (MSFT, Financial) DCF analysis, a reliable and data-driven approach to estimating its intrinsic value. Instead of using future free cash flow as in the traditional DCF model, the GuruFocus DCF calculator uses EPS without NRI as the default for the DCF model based on research that shows that historically stock prices have been more correlated with earnings than free cash flow.

As of 2024-03-18, Microsoft Corp’s intrinsic value as calculated by the Discounted Earnings model is $292.58. It’s currently trading at a price of $416.42. Therefore, the margin of safety based on the DCF model is -42.33%. The company is modestly overvalued.

The model

The GuruFocus DCF calculator follows a two-stage model by default. This model consists of the Growth Stage and the Terminal Stage. In the growth stage, the company is experiencing faster growth, while in the terminal stage, a lower growth rate is applied because sustained rapid growth is not sustainable in the long run. Microsoft Corp’s intrinsic value estimated by Discounted Earnings model are arrived at by following assumptions and steps.

Assumptions

Term Value Explanation
EPS without NRI $11.07 GuruFocus DCF calculator uses EPS without NRI as the default because historically stock prices are more correlated to earnings than free cash flow.
Discount Rate 11% An appropriate discount rate is typically the risk-free rate plus the risk premium of the stock market. GuruFocus uses the current 10-year Treasury Constant Maturity Rate of 4.31%, rounded up to the nearest whole number, which is 5%. A 6% risk premium is then added to arrive at the estimated discount rate.
Growth Stage Growth rate (g1) = 17.50%
Years of Growth Stage = 10
We choose the growth rate based on the availability, prioritizing the average EPS without NRI growth rate from the past 10, 5, or 3 years in that order, and then capping between 5% and 20% to maintain a fair and balanced estimate. The default…

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