Morgan StanleyMSNYSE

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DCF Valuation

DCF Valuation Summary

Strong Sell

Fair Value: $41.09 per share(market-calibrated)

-75.4%

Upside to Fair Value

Current

$167.00

Pure Model

$27.49

Fair Value

$41.09

Bull Case

$43.32

Bear Case

$8.28

Market Reality Check

Model Terminal Growth

2.50%

Market-Implied Growth

3.77%

Calibrated Growth

2.94%

Fair value uses 65% model / 35% market-implied terminal growth. Pure model: $27.49.

What's Driving This Ratingfor MS

↓

CapEx normalizing toward maintenance

Historical CapEx is 2.61% of revenue (heavy investment phase). Model fades this to 1.50% by Year 10, freeing up ~$1.2B in annual FCF. This is the biggest driver of long-term cash flow improvement.

↑

Margin expansion modeled

Current EBIT margin is 21.19% — below the sector mature average of 28.00%. Model expands margins as the business scales and operating leverage kicks in. Year 10 EBIT reaches $29.0B (26.21% margin).

→

Moderate revenue growth

Analyst consensus projects -34.25% revenue growth, fading to 2.50% by Year 10. Revenue reaches $110.8B (vs $116.1B today).

↔

Perpetuity and exit methods disagree

Perpetuity growth gives $66.16/share (25.3x terminal FCF) while exit multiple gives $-11.18/share (16.1x terminal FCF). The base case averages both methods.

🎯

Market pricing in higher long-term growth

To justify $167.00, the market implies 3.77% perpetual growth — 127bps above the model's 2.50%. This suggests the market sees additional growth catalysts (AI, new products, market expansion) not captured in analyst estimates.

✓

Strong cash flow conversion

Year 10 FCF/EBITDA conversion of 74.61% indicates efficient cash generation. FCF reaches $24.8B by Year 10 (22.42% FCF margin).

Weighted Average Cost of Capital (WACC)

Cost of Equity (CAPM)

Risk-Free Rate (Rf)4.50%

Beta (β)1.18

Market Risk Premium4.50%

*Using current implied premium (4.5% per Damodaran 2026), not historical (6.5%)

Cost of Equity (Re)9.81%

Cost of Debt

Pre-tax Cost of Debt6.13%

Tax Rate22.45%

After-tax Cost of Debt4.75%

Equity Weight (E/V)35.55%

Debt Weight (D/V)64.45%

WACC Calculation

WACC = (E/V × Re) + (D/V × Rd × (1-Tc))

WACC = (35.55% × 9.81%) + (64.45% × 4.75%)

= 6.55%

10-Year Free Cash Flow Projections(showing years 1, 3, 5, 7, 10)

Year	Year 1	Year 3	Year 5	Year 7	Year 10
Revenue	$76.3B	$84.7B	$97.9B	$102.9B	$110.8B
EBIT	$16.2B	$18.0B	$22.1B	$25.2B	$29.0B
Tax	$3.6B	$4.0B	$5.0B	$5.7B	$6.5B
NOPAT	$12.5B	$13.9B	$17.1B	$19.6B	$22.5B
+ Depreciation	$2.9B	$3.3B	$3.8B	$4.0B	$4.3B
- Capex	$2.0B	$2.0B	$2.1B	$1.9B	$1.7B
- Δ NWC	-$4.0B	$429M	$239M	$251M	$270M
Free Cash Flow	$17.5B	$14.7B	$18.6B	$21.3B	$24.8B
Discount Factor	0.939	0.827	0.728	0.641	0.530
Present Value	$16.4B	$12.2B	$13.5B	$13.7B	$13.2B

FCF Formula: Free Cash Flow = NOPAT + Depreciation - Capex - Change in Net Working Capital

Terminal Value Calculation

Perpetuity Growth Method

Year 10 FCF$24.8B

Terminal Growth Rate2.50%

WACC6.55%

TV = FCF₁₀ × (1+g) / (WACC-g)

Terminal Value$628.8B

PV of Terminal Value$333.4B

Exit Multiple Method

Year 10 EBITDA$33.3B

Exit Multiple (EV/EBITDA)12.0x

TV = EBITDA₁₀ × Exit Multiple

Terminal Value$399.6B

PV of Terminal Value$211.9B

Valuation Summary

Perpetuity Growth Method

PV of Projected FCFs$134.4B

PV of Terminal Value$333.4B

Enterprise Value$467.8B

(-) Net Debt$363.9B

Equity Value$103.9B

Shares Outstanding1.6B

Price per Share$66.16

Exit Multiple Method

PV of Projected FCFs$134.4B

PV of Terminal Value$211.9B

Enterprise Value$346.3B

(-) Net Debt$363.9B

Equity Value-$17.6B

Shares Outstanding1.6B

Price per Share$-11.18

Pure Model Fair Value

$27.49

Average of perpetuity growth and exit multiple methods (before market calibration)

Sensitivity AnalysisPrice per Share

WACC ↓ / Growth →	1.50%	2.00%	2.50%	3.00%	3.50%
4.55%	$113.55	$147.60	$198.26	$189.29	$172.80
5.55%	$48.07	$64.98	$87.43	$118.68	$165.18
6.55%	$5.65	$15.37	$27.49	$43.02	$63.65
7.55%	$-24.79	$-18.68	$-11.35	$-2.42	$8.73
8.55%	$-48.10	$-44.00	$-39.24	$-33.61	$-26.87

How to read: This table shows how the valuation changes with different WACC (discount rate) and terminal growth rate assumptions. Green = undervalued, Red = overvalued.

Scenario Analysis

Bear Case

$8.28

-95.0% vs current

• -25% vs analyst consensus
• Terminal growth: 2.0%
• Beta: 1.47

Base Case

$27.49

-83.5% vs current

• Analyst consensus
• Terminal growth: 2.5%
• Beta: 1.18

Bull Case

$43.32

-74.1% vs current

• +25% vs analyst consensus
• Terminal growth: 3.0%
• Beta: 1.00

Key Assumptions & Drivers• Financial Services Sector

Growth Assumptions (Select Years)

Year 1 Revenue Growth-34.25%

Year 3 Revenue Growth5.34%

Year 5 Revenue Growth2.50%

Year 7 Revenue Growth2.50%

Year 10 Revenue Growth2.50%

Terminal Growth Rate2.50%

Margin & Efficiency

Current EBIT Margin21.19%

Terminal EBIT Margin28.00%

Tax Rate22.45%

Historical Capex / Rev2.61%

Terminal Capex / Rev1.50%

NWC / Revenue10.00%

Key Drivers: Revenue growth, operating margin expansion, capex efficiency, and working capital management are the primary drivers of cash flow generation. Terminal value assumptions significantly impact final valuation.

Institutional-Grade Methodology

Actual Company Data: Revenue, EBIT, Capex, NWC, Tax Rate, Interest Expense, Beta

Market Assumptions: Risk-free: 4.5% (10Y), MRP: 4.5% (Damodaran 2026), Exit: 12x EV/EBITDA (Financial Services sector)

This DCF model is for informational purposes only. Projections are based on assumptions that may not materialize. Past performance does not guarantee future results. Consult a financial advisor before making investment decisions.

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