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Microsoft (MSFT) Stock Analysis
Note: Microsoft (MSFT) is possibly the best company on the face of the earth today. However, everyone knows it and it’s more than reflected in the price of the stock. Slowing growth, less than 1% dividend yield, and large cash flow and earnings multiples should cause investors to pause and think about the stock price!
Microsoft (MSFT) Intrinsic Value – Margin of Safety Analysis
(updated September 2023)
Normalized Diluted Earnings Per Share (TTM): $9.68
Free Cash Flow (TTM): $7.96
Cash Flow From Operations (CFO) Per Share (TTM): $11.72
Estimated Intrinsic Value: $231
Target Buy Price Based on Required Margin of Safety = $210
(Required Margin of Safety Based On Risk Stability Grade:
A = 10%, B = 20%, C = 30%, D = 40%, F = 50%)
Target SELL Price Based on Estimated Intrinsic Value = $277
(Allow Overvaluation Adjusted by Risk Stability Grade:
A = 20%, B = 15%, C = 10%, D = 5%, F = 0%)
Risk / Stability Grade: A
A grade indicates a quality company with a strong balance sheet, high earnings quality, and a positive business environment. These stocks require the slimmest margin of safety within the stock universe.
B grade indicates a company with a good balance sheet, good earning quality, and a stable business environment. The margin of safety required should be greater than stocks with an A grade but less than the average stock.
C grade indicates a company with a sufficient balance sheet, at least average earnings quality, and a reasonably stable business environment. The margin of safety required is greater than A & B stocks, but less than D & F stocks.
D grade indicates a company in good standing but has issues that could affect its stability and long term risks. D rated stocks should require a large margin of safety when purchased.
F grade indicates a company with significant issues that are currently affecting its stability and long term risks. Require an extremely large margin of safety for F rated stocks when purchased.
Financial Risk Grade: A
A grade indicates an extremely low probability of a dividend cut. This rating is reserved for companies with strong balance sheets and/or excellent dividend histories.
B grade indicates a very low probability for a dividend cut.
C grade indicates a low probability for a dividend cut and/or average safety risk.
D grade indicates there are issues that should be considered concerning future dividend payments.
F grade indicates serious dividend safety risks. Investors should complete comprehensive due diligence before investing.
Business Quality Grade: A –
A grade indicates earnings quality is high or far above average.
B grade indicates earnings quality is good and/or above average.
C grade indicates earnings quality is acceptable or average.
D grade indicates earnings quality is poor and requires thoughtful due diligence.
F grade indicates the quality of the earnings is poor or far below average requiring serious due diligence.
Earnings Report: 6/30/23
AAAMP Portfolios Position Disclosures:
Dividend Growth & Income (DGI) – None
Treasure Trove Dividend (TTD) – None
Global Dividend Value (GDV) – None
Global Value (GV) – None
Global Value Aggressive (GVA)- None
Global High Yield (GHY) – None
Industry: Software – Infrastructure
Microsoft develops and licenses consumer and enterprise software. It is known for its Windows operating systems and Office productivity suite. The company is organized into three overarching segments: productivity and business processes (legacy Microsoft Office, cloud-based Office 365, Exchange, SharePoint, Skype, LinkedIn, Dynamics), intelligence cloud (infrastructure- and platform-as-a-service offerings Azure, Windows Server OS, SQL Server), and more personal computing (Windows Client, Xbox, Bing search, display advertising, and Surface laptops, tablets, and desktops). Through acquisitions, Microsoft owns Xamarin, LinkedIn, GitHub, and Zenimax Media.
Microsoft has a pristine balance sheet and the ability to make acquisitions to boost profitability and growth. The company’s old businesses are “cash cows” and its Azure platform is a leading service in moving customers to public cloud environments. Subscription growth is increasing margins.
Microsoft faces stiff competition in a world where technology is experiencing rapid change. The company faces formidable competition from Amazon, Google, Apple, Hewlett-Packard, IBM, Oracle, SAP, Cisco Systems, and other titans in the industry.
Recent success under the management of Nadella has proven that Microsoft has the opportunity to excel in the current environment. A pristine balance sheet, successful flagship products, new cutting edge platforms, and what appears to be insightful management gives Microsoft solid opportunities for providing shareholders earnings and growth.
There is no room for large mistakes or errors given the intense competition both above and below the company. Microsoft must execute near flawlessly to succeed in to justify the higher valuation being given the stock.
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While Arbor Investment Planner has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability, or completeness of third-party information presented herein. The sole purpose of this analysis is information. Nothing presented herein is, or is intended to constitute investment advice. Consult your financial advisor before making investment decisions.