1. Source: bigcharts.com
Microsoft (MSFT - $54.19)
Price Target: $59 Projected Upside: +14% Recommendation: BUY
Sector: Technology Industry: Technology
October 15, 2015
Zachary Van Dyke
zvandyke@students.stonehill.edu
781-690-3864
CAGR
Estimates (FYE: 12) 2015 2016E 2017E ’15-‘20E
Revenue ($MM) $93,580 $93,471 $99,711 +8%
% Chg. +13% +6% +14%
EPS (Diluted) $1.47 $2.60 $2.81 +21%
% Chg. -46% +79% + 7%
Consensus EPS/Trend: $1.84 $2.67 $3.31
Valuation:
P/E 23.0x 17.3x
P/S 4.1x 3.9x
Estimated Intrinsic Value: $50
52-Week Range: $39.72-50.05 Beta: 0.84
Market Cap ($MM): $379,382 % Inst. Owned: 81%
Avg. Vol. (MM): 26.15 Insider Owned: 3%
Dividend Yield 3.1% WACC: 9.1%
BUSINESS OVERVIEW
Microsoft, based out of Redmond, WA, is one of the world’s largest technology firms, bringing in over $93 Billion in
revenue last year through its various business segments. Under their new CEO, Satya Nadella, the firm operates multiple
segments including, D&C Licensing, made up of OEM and Office Consumer revenue (operating systems), Computer and
gaming hardware, phone, commercial licensing and commercial other (cloud revenue).
INVESTMENT THESIS
Microsoft is a BUY at a price below $52.97 based on:
 Cloud Segment Growing Faster than Competition. Cloud revenue currently sits slightly above $8B as a portion of
Commercial Other and is projected to hit $20B by 2018. With Microsoft’s aggressive acquisitions and business shifts,
as well as strong cloud based product growth, it makes a strong case to set up shop as a top cloud service provider.
With 96% YOY growth (Q4 2014) Microsoft grew faster than all of its competition, implying market share growth.
 New CEO Has Re-innovated Product Pipeline. Windows 10 has had over 110 Million downloads in the first month
alone, faster than any operating system (OS) in Microsoft’s history. The Surface line of tablets is expected to hit 14%
market share by 2019. Full integration of Microsoft products under Windows 10 also increases reliability of product
segment growth. Expansion into computer market (Surface book) and pre-order sell out indicate potential for high
growth in that sector in coming years.
 14% upside based on 12-18 month intrinsic valuation. MSFT is currently trading at $54.17, a 14% discount to its
intrinsic value of $53 and 12-18 month price target of $59. A share price of $52.97 presents a 14% upside.
ISSUES AND RISKS
 Heavy Competition in Both Consumer and Enterprise Markets- The cloud marketplace has become
increasingly competitive as more firms attempt to take advantage of the market trend.

2. Stock report for THE HERLIHY OPPORTUNITY FUND │October 15, 2015│NASDAQ: MSFT │zvandyke@students.stonehill.edu
 Free & Low End Alternatives- Competitors (Google) consistently launch free or low cost lower end alternatives to
Microsoft’s paid software and has in the past forced lower prices on Microsoft.
 Piracy- Both Windows and Office businesses have experienced piracy pressures. Any increase in piracy rates could
adversely effect the company.
INVESTMENT THESIS
I recommend a BUY for MSFT at the current price of $52.97 for three reasons:
 Management indicated that they expect Cloud Service revenue to reach
$20B in revenue from this segment alone by 2018. Microsoft’s cloud is one of
the largest in the world (operating at hyper-scale) and powers over 200 services
for their customers. By year end 2014, Microsoft’s cloud market share growth
grew 96% YOY, larger than any of the top competition. Product growth across
office platforms, tangible products linked to cloud services and Cloud server and
data center growth are all strong indicators that Microsoft will hit $20B in cloud
revenue by 2018. Microsoft currently holds a 10% market share in the PaaS
market (1.7B) and 16.2% market share in the IaaS (15.1B) market (third and
second place respectively). These markets are set to grow at 36% and 19%
compounded annually through 2026 respectively. The firm is working to make
Microsoft Azure and Office 365 the number one “cloud city” that they hope
eventually everyone will join. Microsoft has made a lot of acquisitions and in
house solutions to enhance the capabilities of Azure, Dynamics CRM and Office
365, including recent acquisitions of Sensei Project Solutions, Inc. and Projectum
Aps. These acquisitions were based on the need to enhance the project app in
Office 365. As customer experience continues to show positive growth in Office 365, it increases the likelihood of
office users becoming Azure (cloud) clients as well. With over 90.53% of corporate PC’s and desktops worldwide
operating on Windows OS, there is high potential to transfer a large portion of that 90.53% onto Azure. Most recently
they have made strides in the ability for employees using the 365 services to do so on IOS, Google Android, as well as
windows mobile devices. This helps fill a gap created by their 3% market share of the smartphone market by having
windows services available on competitor platforms. Microsoft currently has more than 100 data centers world-wide,
opening three in India (September 2015). Microsoft projects cloud revenue in India to grow to 25% vs the 12-14%
average cloud revenue in prior years. This growth in one of the largest tech countries in the world is just one example
of the high potential for Microsoft’s cloud growth globally.
 New CEO Has Re-innovated Product Pipeline. Culture, something that could be said to have been lacking prior to
Nadella, is now a driver of the firm. The company has since adapted a more customer friendly product development
approach as well as a learning and growth culture in house, more characteristic of the competition in the industry such
as Google and Apple. Nadella’s impact stems far beyond culture. Microsoft’s stock has risen 53% since its long
stagnation prior to the new CEO. The firm has seen major product innovation with significant impact including
Windows 10. The new software has had over 110 Million downloads in the first month alone, the fastest adoption by
any Microsoft OS in the company’s history. The firm has also made strides in the tablet market. The overall tablet
market grew by 2.1% YOY 14-15. The Surface currently sits at 2.9% market share of the overall market, and is
expected to hit 14% by 2019. The Surface also has a 7.0% market share of 2-in-1 tablet markets. Nadella has also
made the long awaited push of the first Microsoft laptop, the Surface Book, which sold out of pre-orders within the
first week of sales. Sales for Q4 are projected between 50,000-100,000 units. The firms recent release of Office 365
has grown market share in the space to 25.2% of enterprises, a 227% increase YOY, and it is now the most widely used
business cloud application of any type. Microsoft Office 2016 was also recently unveiled, both 365 and 2016 which
will help grow Microsoft’s cloud network and user base. Microsoft also had a recent acquisition of Havoc from Intel,
the leading provider in 3D physics and gaming. This acquisition has positive upside for multiple business segments
including, computer and gaming hardware as well as the cloud, yes the cloud. Not only does the acquisition present
positive growth opportunities for the Xbox and gaming division, Microsoft also believes it will have a positive impact
on the Visual studio and Azure divisions thanks to its extensive tools and platform components. These are all clear
Corporate PC and Desktop Mkt Share

3. Stock report for THE HERLIHY OPPORTUNITY FUND │October 15, 2015│NASDAQ: MSFT │zvandyke@students.stonehill.edu
examples of Microsoft building a strong product line that follows the methodology of the “one windows” approach
Nadella has brought forward. The benefit of the strong and growing product line, all operating with OS and enterprise
software capabilities, as well as non-Microsoft products using the software, show business growth as well as a strong
upside to the cloud service growth.
 14% upside at $52.97 based on 12-18 month intrinsic valuation. MSFT is currently trading at $52.97, a 14% discount
to its 12-18 month price target of $59.
 Heavy Competition in both Consumer and Enterprise Markets: Microsoft competes against a wide range of
competition from diversified global companies with substantial research and development resources, to smaller cap
specialized firms with less broad product lines giving rise to their potential to be more efficient in deploying technical,
marketing and financial resources to a product. Barriers to entry in the majority of the segments Microsoft currently
operates in are constantly changing due to disruptive technologies, shifting user needs, and the introduction of new
products and services. Microsoft’s ability to remain a competitor is directly correlated to their success in making
innovative products, devices, and services that either hold or increase market share. One example of this competition
risk occurred when they were late to the mobile phone era, resulting in their phone division holding only 3% of the
overall mobile device market. This occurred under MSFT’s prior CEO Ballmer under which the firm experienced
extreme stagnation. Under the current, highly innovative structure of Nadella, this risk may be less prevalent. The
recent releases of the Hololens, Microsoft Band, and Azure are examples of Microsoft competing with new products
from competitors, Google glass, Apple watch and fitbit, and Amazon Web
Services respectively.
 Low End Alternatives Encroaching on Office Foothold: After
dominating the office application market for years, Microsoft Office and
365 has seen increasing competition from Google docs and Google for
work respectively. These apps include word processing, spreadsheet, and
presentation apps and undercut MSFT’s prices causing it to gain traction
among start-ups and younger users. This also promotes potential individual
customer sales loss to Google apps as it is free for those with an account.
This also presents a potential loss of Microsoft One Drive cloud storage to
Google drive and a more difficult switch to become fully integrated on
Microsoft’s Cloud services. Microsoft clearly has a more reliable and
stronger product (365) for large corporations. They now hold 25.2% of the market share vs. Google for work 22.8%.
 Piracy: Both Windows and Office businesses have had historical pressures of piracy, especially in emerging
economies (more than 50% of Microsoft’s revenue comes from outside the US). Subscription based offerings such as
Office 365 may help offset this issue. Any news of piracy may have negative impacts on Microsoft’s foreign revenue
and US revenue.
BUSINESS OVERVIEW
Management: Founded in 1975, Microsoft is a publicly traded technology company operating in the Business Software &
Services industry. Their current CEO and Director, Mr. Satya Nadella, succeeded Steve Ballmer in February, 2014. Their
Co-Founder is Mr. William Henry Gates III. Nadella was formerly the executive vice president of Microsoft’s Cloud and
Enterprise group. In this role he led the transformation to the cloud infrastructure and services business, which
outperformed the market and took market share from competition. With the major driver of Microsoft’s current business
strategy being focused on Cloud Services growth, he is a great fit for the team and his highly innovative company structure
has brought Microsoft out of its stagnation state from a couple years prior. Amy Hood, CFO, joined the firm in 2002.
Prior to this role she was responsible for the company’s productivity applications and services including Microsoft Office
365, Office, SharePoint, Exchange, Dynamics ERP and Dynamics CRM at MSFT.
Microsoft has a total of 118,000 full-time employees in more than 100 countries. Microsoft’s revenue is divided into six
segments. In order of largest to smallest revenue generation they are as follows, Commercial Licensing, Devices and
Consumer Licensing, Commercial Other, Computing and Gaming Hardware, Devices and Consumer Other, and Phone
INVESTMENT RISK

4. Stock report for THE HERLIHY OPPORTUNITY FUND │October 15, 2015│NASDAQ: MSFT │zvandyke@students.stonehill.edu
Hardware. Microsoft’s wide array of products and services operate under the “One Windows” phrase set by Nadella. It’s
efforts to fully integrate its cloud services across all platforms are derived from this assumption in the hope of creating a
more user friendly experience as well as increasing the value of operating with ease on an all Microsoft platform.
2015 2016
% of
total 2017 % Chg 2020
CAGR
'11-15 16-20E
Devices and Consumer
Licensing $14,969 $13,876 15% $13,460 -3% $13,589 (6.4)% (1.9)%
Computer and Gaming Hardware $10,183 $11,201 12% $12,769 14% $16,374 +10.9% +10.0%
Phone Hardware $7,524 $3,724 4% $3,128 -16% $3,620 +39.6% (13.6)%
Other $8,825 $9,796 10% $10,481 7% $14,231 +9.2% +10.0%
Commercial
Licensing $41,039 $40,834 44% $42,059 3% $49,616 +2.5% +3.9%
Other $10,836 $13,978 15% $18,591 33% $36,240 +23.6% +27.3%
Corporate and other $204 $203 0% $209 3% $242 N/A +3.5%
Total Sales $93,580 $93,410 100% $100,490 8% $133,670 +6.1% +7.4%
Key Takeaways: Computer and gaming hardware projected growth derived from
increased sales of the surface tablet (projected to grow to 14.1% by 2019) as well as the
recent sell out of the new Surface book within the first week of sales are key drivers to
the growth. The XBOX One’s growth against the PS4 in recent quarters also suggests
future growth. The main growth factor in MSFT is in the Commercial Other segment, in
regards to the cloud service revenue. The introduction of Windows 10, Office 2016,
Office 365, all of which allow corporations to utilize the Windows Enterprise and Azure
cloud services, are fueling growth in the segment. With the increased demand to have a
fully integrated OS under one firm, and Windows operating systems in 80% of Fortune
500 companies and over 90% market share across all corporate PC’s and Desktops, this presents a highly probable upside
for growth in this sector. The firm’s continued acquisitions to enhance the cloud growth and user experience across the
software platforms are also highly correlated to the projected growth in the sector. With over 100 Data centers worldwide,
and growing (via acquisitions) and 25 of them being devoted to cloud growth and services, makes Microsoft one of three
hyper-scale cloud service providers. The weakness of the Phone hardware division stems from a 3% market share in the
space as well as Microsoft stores and AT&T being the only sellers of the Lumia phone product line. Verizon, Sprint and T-
Mobile have no intention of selling the newest line of Lumia Phones.
Product Segments:
Commercial Licensing includes Windows Server,
Microsoft SQL Server, Microsoft Office for business,
including Office, Exchange, SharePoint, and Skype for
Business.
Commercial Other includes, Commercial Cloud,
comprising Office 365 Commercial, Microsoft Azure,
Dynamics CRM Online, and other Microsoft Office online
offerings; and Enterprise Services, including Premier
Support Services and Microsoft Consulting Services.
Devices and Consumer Licensing includes Windows
including all OEM licensing (“Windows OEM”) and other
non-volume licensing and academic volume licensing of
the Windows operating system and related software; non-
volume licensing of Microsoft Office, comprising the core
Office product set, for consumers (“Office Consumer”);
Windows Phone operating system, including related patent
licensing; and certain other patent licensing revenue.
Computing and Gaming Hardware includes Xbox
gaming and entertainment consoles and accessories,
second-party and third-party video game royalties, and
Xbox Live subscriptions (“Xbox Platform”); Surface

5. Stock report for THE HERLIHY OPPORTUNITY FUND │October 15, 2015│NASDAQ: MSFT │zvandyke@students.stonehill.edu
devices and accessories (“Surface”); and Microsoft PC
accessories.
Devices and Consumer Other includes Resale, consisting
of transactions in our Windows Store and Xbox
marketplace; search advertising; display advertising; Office
365 Consumer, comprising Office 365 Home and Office
365 Personal; Studios, comprising first-party video games;
Mojang; and non-Microsoft products sold in Micrsoft retail
stores.
Phone Hardware includes, Lumia phones and other non-
Lumia phones.
STRATEGIC POSITIONING
Market Leadership:
Microsoft is currently the world’s leader in Corporate and
Desktop operating systems with 90.53% market share in
the space as well as being the OS for 80% of Fortune 500
Companies. Its market cap of $378.4M sits above the
industry average of $322M, but below Google ($457M)
and Apple ($628.4M). Google rivals Microsoft highly in
their cloud services as well as office software. Google at
work and Google greatly outweighs Microsoft in phone
sales. Apple also outweighs MSFT in the phone sales
sector. One way Microsoft has combatted their lack of
market share in the smartphone sector has been through their
penetration of the app stores. Microsoft has such a highly coveted
product line when it comes to office software and services and they
successfully implemented the applications into rival phone markets.
This greatly assists the firm in continuing its cloud growth in the sector
even on products not their own. While this does not offset the losses
received from the struggling phone division, it benefits them by
increasing Microsoft’s software exposure in the market as it currently
only holds a 3% market share in tangible phone products. This is a key
example of where Microsoft’s Office, 365, and other applications stand
above the competition. Erik Jewett of Skykick, a company who
provides a service partners use to migrate customers to Office 365, said
the following regarding user experience with the program, “In Excel, there are rich capabilities that aren’t matched
by Google apps. In Outlook, calendar sharing is important, as is delegation. Administrative assistants can manage
their manager's calendar; they don't have that type of delegation with Google apps.”
Cloud Services:
Microsoft (Azure) has dramatically become a top service provider
along with Amazon and Google in the top 3. As shown in the chart
to the right, Azure grew a total of 11% vs Amazon’s AWS growing
1% and Google’s 2% growth. In terms of market share, Microsoft
grew 96% YOY vs Amazon’s 51% and Google’s 81% in 2014.
Microsoft’s Platform-as-a-Service (PaaS) Market share (10%) and
Infrastructure-as-a-Service (IaaS) Market share (16.2%) are in the
top 3 of both markets. IaaS market, 15.1B in 2014, is projected to
grow to 126.2B by 2026 (19% compounded annually). PaaS
market, 1.7B in 2014, is projected to grow to 68.3B by 2026 (36%

6. Stock report for THE HERLIHY OPPORTUNITY FUND │October 15, 2015│NASDAQ: MSFT │zvandyke@students.stonehill.edu
compounded annually) (Wikibon.com). These market growth forecasts validate Microsoft’s projection of cloud
service growth of 40% for the next three years. These projections will bring MSFT to over $20B in cloud revenue
by 2018. Microsoft has a global portfolio of over 100 datacenters world-wide and still growing (via acquisitions).
MACRO FACTORS
Unfavorable Changes in Economic Conditions:
Any of the following or a combination of them will have negative impacts on Microsoft: inflation, recession or
other changes in economic conditions. These factors may result in a lower amount of information technology
spending and adversely affect their revenue. Microsoft is heavily reliant on its extensive partner network. The
impact of a major distributor going bankrupt or failing due to poor economic conditions could have a significant
impact in disrupting MSFT’s sales channel distribution. Unfavorable economic conditions may also harm
Microsoft’s consumer’s ability to pay for products and services they have purchased or plan to purchase. This
could result in higher allowance for doubtful accounts, lower sales, and lower prices on products so as to not lose
market share. Google’s lower priced Google at Work is a prime example of how Microsoft could lose market
share in a down economy due to their lower pricing strategy. It is during times of uneasy economic conditions
where substitute goods such as that of Google’s office services may be chosen over the higher quality goods,
Microsoft Office and 365.
Foreign Market Risk:
Microsoft currently operates in over 100 countries and more than 50% of the company’s revenue comes from
outside the US. Operations outside of the US are also susceptible to changes in trade protection laws, privacy
laws, and other regulatory requirements affecting trade and investment. With emerging markets as a significant
focus of MSFT’s international growth strategy, the development of these countries brings with it risk.
Deterioration of social, political, labor, or economic conditions in a specific country or region and or difficulties
staffing and managing foreign operations may have negative financial results to the firm.
MANAGEMENT GUIDANCE AND CONSENSUS TRENDS
Management’s guidance has been positive over the past year with Microsoft hitting their numbers in each
of the last four quarters. Most recently the firm surpassed consensus expectations of $0.56 EPS this past July,
earning $0.62 per share. Microsoft’s cloud business is one of the promising growth drivers with commercial
cloud revenue increasing 106% YOY, thanks to strong results in Microsoft’s Azure enterprise cloud computing
platform and Office 365 cloud based productivity software. Surface revenue also grew 44% to $713 million after
the strong performance of the Surface 3. With an increased market demand for more portable 2-in-1 type
platforms Microsoft has seen this as a major driver for the segment’s growth. As Microsoft moves towards a

7. Stock report for THE HERLIHY OPPORTUNITY FUND │October 15, 2015│NASDAQ: MSFT │zvandyke@students.stonehill.edu
cloud and mobile first enterprise, the significance of its windows business still exists. With Windows powering
over 90% of global desktop computers, the segment produces a significant amount of cash flow that Microsoft
has used to invest in its growth businesses such as the cloud as well as returns to investors in the form of share
repurchases and dividends.
CATALYSTS FOR INVESTMENT
 Market demand for cloud based services and Microsoft’s continued top level growth in the sector present
a major upside for investment
 Growing market demand for full integration on a single platform; Microsoft is a market leader in
providing such a service
 Market share gains across gaming and hardware (Surface and Xbox)
PORTFOLIO STRATEGY
The SCIFI Herlihy opportunity fund currently does not own any stock of Microsoft (MSFT) in the portfolio. Given
the intrinsic value implications and high growth in the cloud sector opportunities, I propose we BUY MSFT at any
price below $52.97 a share which presents a 14% upside.
COMPARABLE VALUATION SUMMARY
Performance
Last MktCap Calendar PE PEG % EPS Chg DuPont I.D.
SYM Price ($mm) 2016E 2017E 2016E 2017E 2016E 2017E PM TAT EM
MSFT US Equity $46.68 $378,409 23.0x 17.3x 2.9x 2.2x +79% +8% 22.6x 0.5x 2.5x
GOOG US Equity $651.16 $457,057 22.5x 19.3x 1.3x 1.1x na +17% 21.9x 0.5x 1.3x
ORCL US Equity $37.26 $158,900 14.1x 12.9x 1.7x 1.5x +15% +10% 26.0x 0.4x 2.3x
AAPL US Equity $110.21 $628,497 12.1x 11.3x 0.7x 0.7x +42% +7% 21.6x 0.9x 2.1x
IBM US Equity $150.01 $146,939 9.6x 9.3x 1.5x 1.4x (7)% +2% 13.0x 0.7x 9.8x
CA US Equity $28.64 $12,639 11.9x 11.4x 2.1x 2.0x +32% +4% 19.8x 0.4x 2.0x
SYMC US Equity $20.60 $14,094 11.3x 10.3x 1.3x 1.2x +22% +9% 13.5x 0.5x 2.2x
CIEN US Equity $22.34 $3,010 17.7x 13.8x 1.1x 0.9x +468% +28% (1.8)x 1.1x (29.8)x
Average: $224,943 15.3x 13.2x 1.6x 1.4x +93% +11% 17.1x 0.6x -1.0x
DCF VALUATION SUMMARY
The Intrinsic valuation is the main
driver of the investment thesis.
Given the following assumptions, I
value Microsoft at $59.00 per share
and 3.8X P/S.
DCF Valuation Equity Capital
Avg Intrinsic Value 53 Current Sahre Price 54.19
Proj 12-mo Avg intr Val. 59 Shares Outstanding 8,254
Implied 12-mo P/E 19.44 Equity MV 378,409
Implied PEG 2.21
Implied 12-mo P/S 4.20
Assumption Debt to Capital
Cost of Equity 9.7 Total Debt 35384
WACC 9.1 Cost of Debt 2.50%
Terminal Growth Rate 2.5 TaxRate 23.50%

8. Stock report for THE HERLIHY OPPORTUNITY FUND │October 15, 2015│NASDAQ: MSFT │zvandyke@students.stonehill.edu