Why Microsoft’s Stock Is Worth $102: An Interactive Breakdown

by Trefis Team
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Microsoft (NASDAQ:MSFT) recently reported its Q4 and full year results for fiscal year 2018 last month. The company has reported sustained revenue growth in recent years, with a nearly 10% increase on an annual basis. Microsoft’s net revenues increased from $91 billion in FY’16 to over $110 billion in FY’18. The company has mainly reported strong revenue growth from non-computing revenue streams over the last couple of years. While this trend continued through fiscal 2018, Microsoft’s Personal Computing revenues also increased 10% in FY’18 to $42.3 billion after a revenue decline in FY’17. Additionally, Microsoft’s reported non-GAAP margin improved from around 30.3% in FY 2016 and FY 2017 to 31.8% in FY 2018. Based on recent results, market trends and an updated near-term outlook for the company, we have revised our price estimate for Microsoft to $102, which is slightly below the current market price. We have summarized our FY’19 expectations for the company on our interactive Microsoft valuation dashboard, where you can modify any of our forecasts or assumptions to see how changes impact the company’s earnings forecasts and valuation.

Key Growth Metrics

Non-computing segments have grown rapidly for Microsoft in recent years. In the fiscal year ended June, the company reported a 19% revenue increase for non-computing revenue streams to $68.1 billion. Within this segment, Microsoft reported a 20% year-over-year growth in Productivity and Business Processes revenues to almost $36 billion. This trend should continue through FY’19, with revenues expected to increase 16% to almost $42 billion. Similarly, Intelligent Cloud revenues increased 17% to $32.2 billion for the year. We expect this segment to also sustain a mid-teens growth rate through FY’19 to over $35 billion.

On the other hand, the company reported an 8% increase in More Personal Computing segment revenues through FY’18 after revenue declines in the previous fiscal year. This was largely due to the strong demand for Windows Commercial, OEM Pro, and Surface. That said, we expect revenue growth to slow down somewhat owing to the cyclical nature of product sales in the segment. It should be noted that Microsoft’s operating margin improved by 170 basis points to almost 32%. The improvement in operating margin (and the resulting net margin) can be attributed largely to improving gross margins in the Personal Computing segment. We forecast operating profit margins to expand by 10-30 basis points through the year. Based on our forecasts, we expect the company’s net revenues to stand at $121 billion for FY’19, with a net margin roughly flat over FY’18 at 27.5%. Based on these figures, we forecast EPS of $4.33, which – coupled with an estimated P/E multiple of nearly 24 – implies a valuation estimate of $102 per share.

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