Microsoft’s DCF Value of $527.74 Signals 25.6% Undervaluation
Microsoft’s earnings-based DCF model yields an intrinsic value of $527.74 compared with a $392.74 share price, implying a 25.58% margin of safety and modest undervaluation. Using trailing twelve-month free cash flow, the traditional DCF model values shares at $240.46, indicating a 63.33% overvaluation.
1. Discounted Earnings Model Valuation
The earnings-based DCF model calculates an intrinsic value of $527.74 by discounting EPS without NRI at 10% over a two-stage projection, yielding a growth-stage present value of $262 and a terminal-stage value of $284.01. At a current share price of $392.74, this implies a 25.58% margin of safety, suggesting modest undervaluation.
2. Discounted Free Cash Flow Valuation
The traditional free cash flow DCF model, using trailing twelve-month free cash flow per share, produces an intrinsic value of $240.46. This figure sits 63.33% below the current trading price, signaling potential overvaluation under the free cash flow methodology.
3. Key Model Assumptions
The earnings-based model uses EPS without NRI of $15.34, a 10% discount rate (4% risk-free rate plus 6% risk premium), a 20.50% annual growth rate for 10 years, and a 4% terminal growth rate for the subsequent decade to ensure convergence in valuation.