A quick at-a-glance view of MSFT

1. NOVEMBER 11TH BRIEF STOCK
OVERVIEW
FRANK ULIP
1

2. FINANCIALS
•
Public Company Comparable Analysis
•
Discounted Cash Flows
Current Share Price: $37.59
2

3. Valuation Statistic
Company Name
Hewlett-Packward
Yahoo!
Oracle
Apple
Cisco Systems
Google
Maximum
75th Percentile
Median
25th Percentile
Minimum
Microsoft
Share
Price
$ 26.35
33.81
34.50
519.05
23.45
1010.59
$ 1,010.59
641.94
$ 34.16
25.63
23.45
$37.59
$
$
$
$
$
Capitalization
Equity
Enterprise
Value
Value
50,390,000 $ 61,450,000
35,490,000
32,790,000
158,140,000 141,530,000
467,870,000 444,740,000
127,230,000
91,650,000
338,020,000 291,840,000
467,870,000 $ 444,740,000
370,482,500 $ 330,065,000
142,685,000 $ 116,590,000
46,665,000 $ 54,285,000
35,490,000 $ 32,790,000
313,123,046
$237,980,886
Enterprise Value/
Revenue
2013
2014E
0.5 x
0.6 x
6.9 x
7.4 x
3.8 x
3.7 x
2.6 x
2.4 x
1.9 x
1.8 x
5.8 x
4.9 x
6.9 x
7.4 x
6.1 x
5.5 x
3.2 x
3.1 x
1.5 x
1.5 x
0.5 x
0.6 x
3.1 x
2.9 x
Enterprise Value/
EBITDA
2013
2014E
4.3 x
4.5 x
19.3 x
21.2 x
7.8 x
7.2 x
7.7 x
7.6 x
6.1 x
5.7 x
15.4 x
13.5 x
19.3 x
21.2 x
16.4 x
15.5 x
7.7 x
7.4 x
5.6 x
5.4 x
4.3 x
4.5 x
7.2 x
6.9 x
P / E Multiple
2013
2014E
6.5 x
7.4 x
28.9 x
23.2 x
12.9 x
11.9 x
13.1 x
12.0 x
11.6 x
11.2 x
25.4 x
22.9 x
28.9 x
23.2 x
26.3 x
23.0 x
13.0 x
11.9 x
10.3 x
10.2 x
6.5 x
7.4 x
14.3 x
14.0 x
 Microsoft hovers around the median across all metrics. I have held MSFT’s annual revenue growth at
5.5% for 2014 due to lower initial payments for Office 365 and my expectations of lower than anticipate
Xbox One console sales. The office subscription model boosts long term cash figures while foregoing
large up front payments.
 Despite recent negative news about Steve Ballmer’s handling of the company, he will be leaving MSFT
in a strong financial position. The company’s higher than average P/E ratio could be a sign that
investors are expecting strong growth in the coming months.
 Notice that HPQ is the only firm in which Enterprise Value exceeds Equity Value. This is an ominous
sign as HPQ is carrying over $25B of total debt and only $13B of cash on their balance sheet.
Current Share Price: $37.59
3

4. Operating Statistics
Revenue
Company Name
Hewlett-Packward
Yahoo!
Oracle
Apple
Cisco Systems
Google
Maximum
75th Percentile
Median
25th Percentile
Minimum
Microsoft
EBITDA
2013
2014E
2013
2014E
2013
113,130,000
111,150,000
14,456,000
13,657,000 $ 4.05
4,760,000
4,430,000
1,699,000
1,546,000
1.17
37,121,000
38,370,000
18,158,000
19,792,000
2.68
170,910,000
184,100,000
58,009,000
58,664,000
39.75
48,610,000
50,790,000
15,069,000
15,957,000
2.02
50,175,000
59,640,000
18,929,000
21,546,000
39.82
$ 170,910,000 $ 184,100,000 $ 58,009,000 $ 58,664,000 $ 39.82
127,575,000
129,387,500
28,699,000
30,825,500 $ 39.77
$ 49,392,500 $ 55,215,000 $ 16,613,500 $ 17,874,500 $ 3.37
29,030,750
29,885,000
11,266,750
10,629,250 $ 1.81
4,760,000
4,430,000
1,699,000
1,546,000 $ 1.17
$77,849,000
$82,130,695
$32,925,000
$34,573,122
Projected
Revenue
2014E
Growth
$ 3.55
-1.75%
1.46
-6.93%
2.90
3.36%
43.43
7.72%
2.10
4.48%
44.06 18.86%
$ 44.06
19%
$ 43.59
11%
$ 3.23
4%
$ 1.94
-3%
$ 1.46
-7%
EPS
$2.62
$2.68
5.50%
EBITDA Margin
2013
2014E
13%
12%
36%
35%
49%
52%
34%
32%
31%
31%
38%
36%
49%
52%
41%
40%
35%
33%
26%
27%
13%
12%
42%
42%
Most impressive here is MSFT’s strong EBITDA Margin, a figure
outdone only by Oracle. Operating expenses fell in 2013 thanks to a $0
Goodwill impairment compared to a $6.2B charge in 2012. R&D
remains fixed at 13% of revenue.
Current Share Price: $37.59
4

5. Net Present Value Sensitivity - Terminal EBITDA Multiples
Terminal EBITDA
Multiple
4.0 x
5.0 x
6.0 x
7.0 x
8.0 x
9.0 x
↑
$
$
$
$
$
$
5.7%
34.33
37.66
40.99
44.32
47.65
50.99
$
$
$
$
$
$
6.7%
33.39
36.56
39.74
42.92
46.10
49.28
$
$
$
$
$
$
7.7%
32.49
35.52
38.56
41.59
44.62
47.66
Discount Rate
8.7%
$
31.64
$
34.54
$
37.43
$
40.33
$
43.23
$
46.12
$
$
$
$
$
$
9.7%
30.83
33.60
36.37
39.13
41.90
44.67
$
$
$
$
$
$
10.7%
30.06
32.71
35.35
38.00
40.64
43.28
$
$
$
$
$
$
11.7%
29.33
31.86
34.39
36.92
39.44
41.97
The terminal EDITDA multiple of 7.0x with my estimated WACC of
8.7% gives us a $40.33 estimated stock price. Decreasing the EBITDA
multiple to 6.0x prices the estimated stock value within 0.16 cents of
the actual value on November 11th.
↓ The terminal growth rate of 2.0% with a WACC of
8.7% shows room for appreciation in the current
stock value.
Terminal Growth
Rate
Net Present Value Sensitivity - Terminal Growth Rates
Current Share Price: $37.59
0.0%
1.0%
2.0%
2.5%
3.5%
4.5%
$
$
$
$
$
$
5.7%
62.33
71.55
85.69
96.03
130.53
220.57
$
$
$
$
$
$
6.7%
54.26
60.50
69.37
75.38
92.95
126.18
$
$
$
$
$
$
7.7%
48.27
52.73
58.74
62.61
73.08
90.00
Discount Rate
8.7%
$
43.66
$
46.98
$
51.27
$
53.94
$
60.80
$
70.88
$
$
$
$
$
$
9.7%
40.00
42.54
45.74
47.66
52.45
59.06
$
$
$
$
$
$
10.7%
37.02
39.02
41.47
42.91
46.41
51.02
$
$
$
$
$
$
11.7%
34.56
36.15
38.08
39.19
41.84
45.21
5

6. Here we see an agreement between our public company comparable metrics and our DCF using the 7.0X
EBITDA multiple. We generally expect to see the largest variance in the DCF analysis, but this is not
always the case. I believe the similarities of these metrics add credence to $45 being a reasonable
estimate of the stock’s intrinsic value. This prices lies between the value given on slide five.
Current Share Price: $37.59
6

7. BUSINESS
• Results from Q1 2014
• Restructuring
Current Share Price: $37.59
7

8. RESULTS FROM Q1 2014
 This is the first earnings report released since CEO Steve
Ballmer announced the company would begin a massive
restructuring following the end of the 2013 fiscal year.
 Revenues rose 15.7% to $18.5B which boosted net income to
$5.2B.
 Windows phone market share is 8.8% in Germany vs 9.4% for
iOS and 78.8% for android. Windows Phone has seen strong
growth overseas.
 Windows 8 market share increase to 7% in Q1. This will boost
user migration to subscription based Office 365.
Current Share Price: $37.59
8

9. RESTRUCTURING
On July 11th CEO Steve Ballmer sent out an internal email laying out the future of
MSFT and detailed the 12 (mostly) new groups that would comprise the company.
The purpose of this restructuring was to better foster innovation as the company
moves away from pure software and becomes a “devices and services company”.
Microsoft now has two broad operational divisions: Devices and Consumers, and
Commercial. Below is a table which better explains which products are under each
segment for financial reporting purposes:
Licensing:
Hardware:
Other
Licensing:
Commercial Other
Current Share Price: $37.59
Devices and Consumers
Consumer Windows; Consumer Office; Windows
Phone; Patent licensing
Xbox Platform [Xbox 360, Xbox One, Second/Third
party video games, Xbox Live subscriptions];
Surface; PC Accessories
Resale [Windows Store, Xbox Live transactions,
Windows Phone marketplace]; Search Advertising;
Display Advertising; Office 365 Subscription; Retail
Stores
Commercial
Server Products [Windows Server, Microsoft SQL
Server, Visual Studio, and System Center];
Windows Embedded; Commercial Windows;
Commercial Office [Office, Exchange, SharePoint,
and Lync; Client Access Licenses; Microsoft
Dynamics Business Solutions; Skype
Enterprise Services; Microsoft Consulting Services;
Cloud Services [other Microsoft Office online
offerings, Dynamics CRM Online, and Windows
Azure]; and certain other commercial products and
online services not included in the categories
above.
9

10. CONCLUSION
 My evaluation in January 2013 predicated growth from
$26 per share to over $30 by year end. This months
revaluation affirms that growth will continue.
 I have placed an intrinsic value of $45 on the stock. This is
an upside of 20% over the current price.
 The CEO selection will be vital. Do not expect major short
term shifts in MSFT’s stock price as the markets are held
in abeyance while waiting for Bill Gate’s choice.
 I give this stock a “buy” rating.
Current Share Price: $37.59
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