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DCF Valuation

DCF Valuation Summary

Strong Buy

Fair Value: $766.33 per share(market-calibrated)

+89.1%

Upside to Fair Value

Current

$405.31

Pure Model

$802.53

Fair Value

$766.33

Bull Case

$1,226.29

Bear Case

$508.17

Market Reality Check

Model Terminal Growth

3.75%

Market-Implied Growth

0.50%

Calibrated Growth

2.61%

Fair value uses 65% model / 35% market-implied terminal growth. Pure model: $802.53.

What's Driving This Ratingfor MSFT

↓

CapEx normalizing toward maintenance

Historical CapEx is 12.90% of revenue (heavy investment phase). Model fades this to 6.00% by Year 10, freeing up ~$76.3B in annual FCF. This is the biggest driver of long-term cash flow improvement.

✓

Premium margins already priced in

EBIT margin of 43.99% is already well above sector average. The model holds this level — there's limited room for margin expansion to drive upside. Valuation depends primarily on revenue growth.

↑

Strong near-term revenue growth

Analyst consensus projects 16.28% revenue growth in Year 1, fading to 23.36% by Year 5 and 3.75% by Year 10. Revenue reaches $1.1T by Year 10 (vs $281.7B today).

↔

Perpetuity and exit methods disagree

Perpetuity growth gives $573.11/share (18.5x terminal FCF) while exit multiple gives $1,031.94/share (39.3x terminal FCF). The 28x EV/EBITDA exit reflects current market multiples, while the perpetuity method with 3.75% growth is more conservative. The base case averages both methods.

🎯

Market pricing in lower growth than model

The market implies only 0.50% perpetual growth — 325bps below the model's 3.75%. This suggests the market sees headwinds or risks not in the model.

✓

Strong cash flow conversion

Year 10 FCF/EBITDA conversion of 71.24% indicates efficient cash generation. FCF reaches $401.0B by Year 10 (36.21% FCF margin).

Weighted Average Cost of Capital (WACC)

Cost of Equity (CAPM)

Risk-Free Rate (Rf)4.50%

Beta (β)1.11

Market Risk Premium4.50%

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

Cost of Equity (Re)9.49%

Cost of Debt

Pre-tax Cost of Debt3.86%

Tax Rate17.63%

After-tax Cost of Debt3.18%

Equity Weight (E/V)98.03%

Debt Weight (D/V)1.97%

WACC Calculation

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

WACC = (98.03% × 9.49%) + (1.97% × 3.18%)

= 9.36%

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	$327.6B	$440.5B	$643.7B	$888.1B	$1.1T
EBIT	$144.1B	$193.8B	$283.2B	$390.7B	$487.0B
Tax	$25.4B	$34.2B	$49.9B	$68.9B	$85.9B
NOPAT	$118.7B	$159.6B	$233.2B	$321.8B	$401.1B
+ Depreciation	$22.4B	$30.2B	$44.1B	$60.8B	$75.8B
- Capex	$42.2B	$50.1B	$63.3B	$73.7B	$66.4B
- Δ NWC	$11.0B	$14.9B	$29.1B	$28.5B	$9.6B
Free Cash Flow	$87.9B	$124.8B	$184.9B	$280.4B	$401.0B
Discount Factor	0.914	0.765	0.639	0.534	0.409
Present Value	$80.4B	$95.4B	$118.2B	$149.9B	$163.9B

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

Terminal Value Calculation

Perpetuity Growth Method

Year 10 FCF$401.0B

Terminal Growth Rate3.75%

WACC9.36%

TV = FCF₁₀ × (1+g) / (WACC-g)

Terminal Value$7.4T

PV of Terminal Value$3.0T

Exit Multiple Method

Year 10 EBITDA$562.8B

Exit Multiple (EV/EBITDA)28.0x

TV = EBITDA₁₀ × Exit Multiple

Terminal Value$15.8T

PV of Terminal Value$6.4T

Valuation Summary

Perpetuity Growth Method

PV of Projected FCFs$1.3T

PV of Terminal Value$3.0T

Enterprise Value$4.3T

(-) Net Debt$30.3B

Equity Value$4.3T

Shares Outstanding7.4B

Price per Share$573.11

Exit Multiple Method

PV of Projected FCFs$1.3T

PV of Terminal Value$6.4T

Enterprise Value$7.7T

(-) Net Debt$30.3B

Equity Value$7.7T

Shares Outstanding7.4B

Price per Share$1,031.94

Pure Model Fair Value

$802.53

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

Sensitivity AnalysisPrice per Share

WACC ↓ / Growth →	2.75%	3.25%	3.75%	4.25%	4.75%
7.36%	$1,002.73	$1,040.26	$1,088.18	$1,151.49	$1,239.06
8.36%	$871.66	$894.48	$922.25	$956.77	$1,000.86
9.36%	$770.04	$784.95	$802.53	$823.54	$849.10
10.36%	$687.64	$697.90	$709.71	$723.45	$739.64
11.36%	$618.82	$626.15	$634.44	$643.90	$654.79

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

$508.17

25.4% vs current

• -25% vs analyst consensus
• Terminal growth: 3.3%
• Beta: 1.39

Base Case

$802.53

98.0% vs current

• Analyst consensus
• Terminal growth: 3.8%
• Beta: 1.11

Bull Case

$1,226.29

202.6% vs current

• +25% vs analyst consensus
• Terminal growth: 4.3%
• Beta: 0.94

Key Assumptions & Drivers✓ Using Analyst Consensus Estimates• Technology Sector

Growth Assumptions (Select Years)

Year 1 Revenue Growth16.28%

Year 3 Revenue Growth16.50%

Year 5 Revenue Growth23.36%

Year 7 Revenue Growth15.52%

Year 10 Revenue Growth3.75%

Terminal Growth Rate3.75%

Margin & Efficiency

Current EBIT Margin43.99%

Terminal EBIT Margin45.62%

Tax Rate17.63%

Historical Capex / Rev12.90%

Terminal Capex / Rev6.00%

NWC / Revenue23.90%

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: 28x EV/EBITDA (Technology 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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