Microsoft Discounted Earnings Model Implies 17.5% Undervaluation, FCF Model Shows 80% Overvaluation
Microsoft’s intrinsic value based on a discounted-earnings DCF model is $479.28 per share, implying a 17.47% valuation gap versus its $395.55 market price. A traditional free cash flow–based DCF yields $219.68 per share, indicating an 80.06% negative margin of safety.
1. Discounted Earnings Valuation
Microsoft’s earnings-based DCF model calculates an intrinsic value of $479.28 per share by projecting EPS without NRI of $15.34 over two growth stages, then discounting cash flows at 11%. This suggests the stock is modestly undervalued relative to its current trading price of $395.55.
2. Free Cash Flow–Based Valuation
Using trailing twelve-month free cash flow per share, the traditional DCF approach produces an intrinsic value of $219.68, implying the stock is modestly overvalued with an 80.06% negative margin of safety.
3. Assumptions Behind Valuation
The discounted-earnings model applies a 20.50% EPS growth rate for the first 10 years and a 4% terminal growth rate for the subsequent 10 years, alongside an 11% discount rate derived from a 5% risk-free rate plus a 6% equity risk premium.
4. Divergence in Valuation Methods
The 17.47% undervaluation per the earnings model versus the 80.06% overvaluation per the free cash flow model highlights significant differences in valuation outcomes depending on whether earnings or free cash flows drive the DCF calculation.