Cash flow valuation Microsoft

AI-резюме

=== SUMMARY === - The author performs a discounted cash flow (DCF) valuation of Microsoft (MSFT), arriving at a fair value of ~$383, significantly below Morningstar ($600) and CFRA ($550). - Key assumptions include 14% revenue CAGR for 10 years, a W-shaped capex cycle with heavy AI build-out in FY26–27 then a drop, and a 9% discount rate with 3% terminal growth. - The author is a long-term holder (since 2017/18) and states no intention to add or sell, despite the recent sell-off driven by a lawsuit and a technical sell note. - **Quality assessment:** Well-structured, detailed DDH (Discounted Dividend/Hybrid) with explicit assumptions and risks acknowledged. Falls between well-researched DD and informed speculation due to subjective capex timing. === SENTIMENT === NEUTRAL === TRADE IDEAS === No actionable trade ideas in this post. **Explanation:** The author explicitly states "I wont be adding or selling any MSFT any time soon." While the DCF implies MSFT is overvalued relative to his calculation, no trade recommendation (long/short/avoid) is made or strongly implied. Therefore, no trade ideas meet the confidence threshold.

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***TLDR:*** my fair value is around $383. Morningstar is $600. CFRA is around $550.

**My dangerous assumptions:**

* i looked at the past revenue growth (14+%) ,  the current estimates for future growth (14-18%) and i settled on 14% CAGR
* i am taking a 10 year duration because despite the future being largely unknown, microsoft has managed to be very consistent. Look at the last 6.5 years from 2020, despite pandemic, Ai, inflation and war in ukraine, MSFT has been predictable in revenue growth, earnings and cash generation.
* The other reason for a 10 year duration is  because i want to capture 2 capex cycles, management has said they are depreciating the short lived assets over 6 years. Instead of a straight line capex over 10 years,  i am assuming 2 lopsied V shaped capex, in essence a W shaped capex.
* fy26 (end june 2026) &amp; fy27, the capex will be around 400bn, this will include existing maintenance capex of 40bn a year and AI data centre build-out. Capex drops immediately to 120.0 billion USD in FY 2028 and gently creeps up by 10 billion USD a year (130.0B, 140.0B, 150.0B ). This is because the overall business footprint is expanding by 14%/15% every year.
* In FY 2032 the 6-Year Cycle Repeats  (Year 7), the 6-year server life clock hits zero for the hardware bought back in FY 2026. Because 15% compounding growth means the business doubles in size every 5 years, by Year 7 MSFT has more than doubled in global compute demand. The Capex leaps to 300.0 billion USD because of the 150 billion USD to replace the dead infrastructure (even after tech deflation discounts), and another 150 billion USD to support the massive growth layer.

MS-NR has the WACC of MSFT at 8.9%, i will stick to my usual 9% discount and 3% terminal growth rate.

**The fair value works out to $383. Morningstar has a 4 star rating (undervalued) and a fair value of 600. CFRA has a fair value of 550 and a "Strong Buy" rating.**

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Two pieces of news precipitated the selling of MSFT in the last few days, one was a  lawsuit against MSFT by ambulance chasers, the other was a sell recommendation by Renaissance Macro Research (not that Renanissance), when i looked at the article, it was due to technical analysis reasons.

I bought MSFT in 2017 or 2018, i wont be adding or selling any MSFT any time soon.

**Disclaimer**: my assumptions are probably wrong, I will update it as newer information appears.

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