MSFT Stock – is Microsoft’s Stock a Good Buy Today? Best Investments – $MSFT

Hey YouTube. I’m Jimmy and this video I’m going to walk
through my analysis of Microsoft ticker symbol MSFT. This is the 20th video in our series where we’re analyzing all 30 stocks in the Dow Jones industrial average. What the ultimate goal of taking all of that analysis and building three different
portfolios a value a growth and a dividend you could see a link to all of those videos in the
description below. So Microsoft is a technology company that breaks your business into three
main segments. They have productivity and business processes Intelligent Cloud and more personal computing. And as we could see they’re actually
fairly spread out when it comes to a
revenue perspective. The largest is more personal
computing and that’s got about 38 percent of
revenue. This segment is where they book
revenue for their Windows products. And then they have devices like
their surface laptops Surface Pro things like that. They also have x box both the
hardware and the software. Something like x box live. Then the next largest segment is productivity and business processes. That accounts for about 33 percent
of revenue in this segment Microsoft has all
other office products including Office 365. They also have Skype one drive all the revenue they generate from
owning LinkedIn. They also have their Dynamics
Business Solutions products and then they have their smallest
segment which is their intelligent cloud. This segment consists of their cloud and server products. The key product in this segment is
Microsoft Azure Azure is similar to Amazon’s AWS. In fact it’s the second largest public cloud service behind only AWS. And this brings us to an interesting
point about Microsoft and that is if you think about it Azure is behind AWS as Bing is behind Google. And for me this could be both a
positive thing and a negative thing. Microsoft has a couple big
components of their business that is second best. You could say on one hand that
there’s plenty of upside on the other hand
you could say there’s an enormous competitor in their way. They may never get to be number one. So it’s just something to keep in
the back of our minds. Now Windows 10 is doing quite well
for Microsoft. So it’s going to be tough for
competitors to knock them out of that position. So now let’s look at some numbers and see if Microsoft is worth
investing in. So here’s a chart of revenue and the green bars are estimates. And as we could see analysts are
expecting Microsoft revenue to grow nicely in the next couple of years and leading up to 2018. Microsoft has actually done quite
well in recent years. Now as we could see in the most
recent year revenue jumped from about ninety six billion
to 110 billion. That’s more than a 14
percent jump. Now if you want to dive a bit closer and we could see where that revenue
came from. Here’s a chart of revenue
going back to 2014. This time broken out by percentage of contribution to
revenue by segments as we could see the cloud revenue is getting a bit
bigger each year for the past few years at about 29 percent of revenue. Right now. Meanwhile personal computing is falling. It hit a high of about 46 percent in 2015 and now they’re down to 38 percent
as of last year. Now this shift in revenue mix may be a good thing because when we add our operating margins by segment for the end of 2018 and the end of 2018 is actually as of their 2018 ends at the end of June. So their fiscal year runs June to June just there where they
just finished their first quarter recently. But either way when we add our
operating margins we could see that more personal
computing is only 25 percent. In fact that’s the smallest of the
three segments. When we look at the other two
segments Well they’re both getting larger from a
percentage basis and their margins are better. This should make a good case for Microsoft margins continuing to get stronger. Now moving over to earnings per
share we could see that earnings per share looks
very similar to the way revenue looked. So it seems that Microsoft is
rolling along nicely when it comes to both revenue and profits. Now before we get into valuing
Microsoft stock let’s look at some key points. So recently Microsoft bought a company called GitHub. GitHub is a software development
platform this acquisition helps promote Microsoft’s management’s belief that over the long term software development will be key for the long
term success of any business. So they hope to remain a staple in all businesses going forward. Now one more thing I want
to point out is when Microsoft’s new CEO took over his name is Satya Nadella. He took over. If we jump back to the revenue chart
we could see he took over in 2014. He replaced Steve Ballmer as CEO of Microsoft. And since then it appears that he’s been shifting the business towards a more growth like company and he’s trying to set up the company to dominate for the future. The fact that they’re gradually
shifting towards better margin businesses I think could be a very good
indicator that he seems to be doing a good
job. Plus look at the revenue chart. Since then he’s really started to
pick up pace and analysts have him expecting to continue to do OK so now would
valuation method do we think would be best to
value Microsoft stock so PE would probably the most popular
one and that would probably work well
here since they’re a fairly stable
company and I doubt that profits will be compromised anytime over the
long run. So my personal favorite is of course discounted cash flow. So what I’m thinking is that we
tried both see how they shake out and then try to come up with ultimately what we believe is
the best move with Microsoft. Does it belong in one of our
portfolios. And if you can stick around for the
discounted cash flow valuation because I’m actually going
to do something a little different this time that
I’ve done in some of the other videos where we use DCF. So let’s start with PE for me finding peers from Microsoft might be a bit
tricky because they have so many different
businesses. Google is a good competitor when it
comes to Bing Amazon’s a good competitor with Azure. Apple is a good competitor. While Apple is a big competitor in a
lot of different ways. So for me it makes a lot of sense to
use Microsoft’s own historical PE averages and then try to come up with what we think is the best one
to use going forward. So right now Microsoft’s current forward PE is about 21 x. It’s actually about twenty one and a half X but either way. Call it 21 X their one year average is 24 x their three year average is about 22 X and their five year average is
about 19 x. So which one should we use. Well since it seems that growth is
picking up in the past few years I think it makes sense to use the three year
average since this would account for the fact that things have started to
pick up from Microsoft. If we use the five year average we
might pick up part of what we’ll call the
transition period for management since they just took
over in 2014. So if we’re gonna use a three year
average. Well we need a forward PE. Let’s take the 22 X we multiply that by the expected earnings per
share and that’s about four dollars and ninety six cents according to
analyst estimates. That gives us a fair
value of about one hundred nine dollars. Okay so we have a hundred nine
dollars with PE. Now let’s look at
discounted cash flow. Okay. So now to come up the fair
value using discounted cash flow from Microsoft stock I’m going to try to use the multi-stage discounted cash flow valuation
model. Basically what that means is I’m
going to break their growth into different stages. So the first stage I’m going to take a growth rate of 14 percent to get that number I took I simply took the average of the past two
years and the next year projections
averaged them out came out of the simple
average of 14 percent. Now if we take that 14 percent and we apply it to the next three
years of free cash flow. So we have each year grow by 14
percent. That brings us to our second stage in that stage we’re going to assume a growth rate of 7 percent. Where did I get 7 percent. Frankly it’s half of 14. Because ultimately what I’m trying
to do is instead of a typical just kind of cash flow
valuation that we typically do what we do is
we say OK you have growth rate of 14 percent and then the next day or the next year whenever it is it
drops immediately down to our perpetual growth rate. So for our case we’re going to use a
perpetual growth rate of 2.5 percent. So now we have high growth of 14 percent. Then it drops for a couple
of years at 7 percent and then it hits our perpetual
growth rate. Now another way to do this is you
can have Phase 1 where it grows at a certain period
then a transition period and then it tapers off into your perpetual
growth rate. But again to that another video. So after growing free cash flow by 7 percent for a few years we end up at
2025. Now we assume each of these stages lasted three years and there’s no hard and fast rule
for how many years each stage should last. I stuck with three years because I
feel like three years is an easier number to project
I could project out three years more
confidently than I could protect our let’s say five and then after another stage would
be 10 years and 15 years that could get a bit
complicated. Now typically what we’ve got is we want our research to drive our projections and what it might be. So before pretend you had a pharmaceutical company that was going to grow revenue by 15 percent a year and then in year 5 they lose their patent and you expect it to drop off
quickly. Well you could adjust this type of
model would be perfect for that you’d adjust it
down from whatever the percentages down to whatever you believe the
perpetual growth rate is from there. Okay. But now focusing on Microsoft now we
actually apply a perpetual growth rate to our free cash flow. So what that means is that from 2026 forward Microsoft will grow forever. In our case at 2.5 percent. That being said this is actually a three stage discounted cash flow valuation method. The yellow section is the first
stage than the bottom section is Stage 2. Then the perpetual growth rate. Well that’s the final stage. So now all we need to do is convert
Microsoft’s free cash flow to a present value. We do that by dividing that by our discount factor. In our case we’re going to use a
weighted average cost of capital of eight point five percent. That’s in blue. And basically what do as we take our 1 plus our eight point five percent. Then we raise it to the power of whatever time period right. So for 2019 it’s one plus eight point five percent raise to
the power of one. And since that’s only one time
period way right now you could see it as one
point zero nine. But that’s only that’s a rounding
thing if I had Excel round to three decimal places it
would be showing 1.085. Then in 2020 it’s 1.085 raise to the power of 2. And so on right down the right down
the line then all we have to do is we take our projected free cash flow divided by our discount factor and we end up with the present
value. Add those all up we end up with a fair value. Today all we have to do is divide that by the number of shares
outstanding. And that shows us that our fair
value is 80 dollars per share according to our discounted cash flow
valuation. So this is a chart from Microsoft
stock going back over the past year. And based on our own PE valuation which was about one hundred nine
dollars and our discounted cash flow was about eighty dollars. Well we landed right about in the middle of that right
now that’s about where Microsoft is trading. So called into our calculations it looks at Microsoft. Looks like Microsoft is somewhat
fairly valued. Now personally I really like Microsoft. I like the growth potential of
Microsoft. I think that Microsoft likely belongs in our growth portfolio because it’s possible that their free cash flow ends up
being better than this over the long run. It’s also possible that they get valued higher simply because they become more of a growth
company and the market has a way of favoring
growth companies. So for me this is a tricky one. I really like the company but they seem somewhat fairly
valued. I would at the early stages before we go ahead and build the portfolio. I like the idea of putting them in
the growth portfolio value portfolio probably only
belongs there if it falls even more dividend portfolio probably not they
have a dividend yield of less than 2 percent. So I’m not sure belongs there but what do you think. Does Microsoft belong in any of our
portfolios. Let me know what you think of the
comments below. If you haven’t done so already hit
the subscribe button and thanks for sticking with me all the way to the end of
the video. I see in the next video.

Paul Whisler


  1. Yes! I love Microsoft long term. My second biggest holding!

  2. Good Analysis Jimmy! Even tho cash flow analysis of Microsoft was a bit low, I still like them, I'm for adding MSFT Stock to the growth portfolio

  3. Does this calculation also take in account inflation? Because the longer your horizon is you use on these calculations, the more it matters.

  4. Very informative video! Personally love Microsoft as a company. I think their current growth vectors would be Linkedin and Azure. After that, Satya's cited Quantum Computing, Mixed Reality, and Artificial Intelligence as the focus for the company in his book Refresh. Curious about your thoughts on this. Also, appreciate the in-depth view of the DCF analysis!

  5. I found it interesting that they were one of the few stocks to do well recently and beat earnings, I feel they are making some interesting moves recently such as buying GitHub, I think cloud computing could be huge in the future I think they are well placed to take advantage going forward. Sidenote recently MSFT took over the biggest market cap company for a short period of time.

  6. Nice Video Jimmy! Question: where do you usually get the company’s data information? Thanks

  7. Value Portfolio, if it goes down to 70 – 80 USD 🙃 depends on the price at that time….

  8. I will look at Microsoft in the growth and in the dividend cuz they can always raised a dividend based on the cash that they have

  9. FinBrain analyzes and predicts stocks and currencies using cutting edge Deep Learning algorithms, you can visit our website for more.

  10. I've followed this company all year. It's growing in popularity & trades less volatile than FAANG stocks. It's quiet and persistent. I can't help but want it in my portfolio but the price isn't great nor is it's growth. I think Buffet's advice is worth noting, "Better to buy a great company at a fair price than a fair company at a great price."

  11. Just curious about your DCF math … should you add cash and subtract debt before you divide by shares outstanding (PV + cash – debt) / shares outstanding) to get to share price? MSFT has 136B of cash and 88B of debt, so will be a 48B of value add to your valuation

  12. As a developer I love Microsoft development platforms they are easy to use. GitHub is a great acquisition. Linkedin also. These acquisitions are very focused and visionary.

  13. By far my favorite company ever. Strong financials every quarter, good leadership, diverse, huge market cap, invests in R&D, and extremely ethical (They give back a lot to communities).

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