A Closer Look At Our $89 Price Estimate For Microsoft

by Trefis Team
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Our valuation methodology suggests that Microsoft (NASDAQ:MSFT) stock is worth $89, which is about in line with the current market price. Our price estimate is based on a P/E multiple of around 27, slightly higher than the levels at which the stock has traded in recent years. Microsoft’s Personal Computing revenues have declined in recent years, while Intelligent Cloud revenues have grown consistently. Additionally, Productivity and Business Processes revenues surged in FY’2017, mainly due to additional revenues from the LinkedIn acquisition.

For FY 2018, we expect Microsoft’s revenues to increase nearly 8% to nearly $105 billion, while the net margin is expected to be almost 2 percentage points higher at 24%. We have summarized our expectations on our interactive dashboard platform. If you disagree with our forecasts, you can change the key drivers including individual segment revenue and net margins for Microsoft to gauge how changes will impact its valuation.

Revenue Growth Drivers

Microsoft’s Intelligent Cloud segment includes revenues from cloud-based server platform Azure as well as the Windows server and SQL server segments. This division also includes revenues from support services and consulting services. Intelligent Cloud revenues have consistently increased in recent years, with the global IaaS and PaaS markets growing rapidly. This is likely to continue to benefit Microsoft in the coming years. Combined Server and Cloud Services revenues have grown at 17-18% to $11.8 billion through the first half of the fiscal year. Consequently, we forecast Intelligent Cloud revenues to increase in the low teens for fiscal year 2018 to $31 billion.

Similarly, we forecast Productivity and Business Processes revenues to grow rapidly through the year, by around 14% to nearly $35 billion. Office products and related cloud services are likely to contribute meaningfully to this revenue growth.

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