Its impressive ROE & ROTE affirm its financial strength…
Microsoft Corporation (MSFT) remains a cornerstone of the technology sector, powered by its leadership in cloud computing, artificial intelligence (AI), and enterprise software. As of June 19, 2025, investors are eager to determine whether MSFT’s stock price reflects its fundamental value and how effectively the company generates returns. This article employs two valuation approaches—Warren Buffett’s Discounted Cash Flow (DCF) model and the McGrew Valuation Method—to estimate Microsoft’s intrinsic value per share. Additionally, it examines the company’s Return on Equity (ROE) and Return on Net Tangible Equity (ROTE) to assess profitability. Drawing on financial data from 2020 to 2025, sourced from Microsoft’s quarterly reports and validated with platforms like Yahoo Finance and GuruFocus, this analysis offers a detailed perspective for investors. #Microsoft #StockValuation #Investing
Intrinsic Value Analysis
Data Sources and Methodology
The valuation utilizes five years of Free Cash Flow (FCF) data, shares outstanding, and growth projections from Microsoft’s financial statements (SEC filings and provided CSV data). The last closing price, confirmed as $479.86 on June 18, 2025, through Yahoo Finance and Google Finance, closely matches the provided price of $480.24. Annual FCF is calculated for fiscal years 2020–2024, with shares outstanding at 7.434 billion as of March 31, 2025. Growth rates are derived from historical FCF, yielding a 5-year Compound Annual Growth Rate (CAGR) of 12.83% and a 3-year CAGR of 3.52%. These align with industry outlooks from Yahoo Finance’s “Analysis” tab, highlighting Microsoft’s robust growth in cloud (Azure) and AI. #Finance #ValuationModels
Buffett Valuation Method
The Buffett Valuation Method, a DCF-based approach, applies a constant growth rate based on the 3-year FCF CAGR. With a 3-year CAGR of 3.52% (below 10%), Microsoft is classified as a stable stock, using a 5% growth rate for Years 1–10. Starting with FY 2024 FCF of $70,576 million, the FCF projection includes:
- Year 1: $74,105M
- Year 10: $114,961M The terminal value in Year 10, calculated with a 2.5% perpetual growth rate and an 8% discount rate (4% Treasury + 4% premium), is $2,142,473 million. Discounting all cash flows to present value results in a total intrinsic value of $1,589,830 million. Dividing by 7.434 billion shares yields an intrinsic value per share of $213.86. With a 25% margin of safety, the price is $160.40. Compared to the closing price of $479.86, MSFT is overvalued, as the stock price exceeds 136% of the intrinsic value ($288.71). #BuffettValuation #DCF
McGrew Valuation Method
The McGrew Valuation Method accommodates dynamic growth rates, suitable for growth stocks like Microsoft. With a 5-year FCF CAGR of 12.83% (above 10%), Microsoft qualifies as a growth stock. The growth rate begins at 12.83% in Year 1, declining linearly to 10% by Year 7 (0.472% annual decline), then remains at 10% for Years 7–10. Projecting from $70,576 million FCF:
- Year 1: $79,630M
- Year 10: $200,123M The terminal value, using a 2.5% perpetual growth rate and 8% discount rate, is $3,729,564 million. Discounted cash flows total $2,558,055 million, resulting in an intrinsic value per share of $344.10. Applying a 25% margin of safety gives $258.08. The closing price of $479.86 surpasses 136% of the intrinsic value ($464.54), indicating MSFT is overvalued. #McGrewValuation #GrowthStocks
Valuation Table
| Stock Ticker | Valuation Method | Intrinsic Value per Share | Price with 25% Margin of Safety | Last Closing Price | Valuation Status |
|---|---|---|---|---|---|
| MSFT | Buffett Valuation | $213.86 | $160.40 | $479.86 | Overvalued |
| MSFT | McGrew Valuation | $344.10 | $258.08 | $479.86 | Overvalued |
Valuation Status
Both methods deem MSFT overvalued at $479.86, reflecting a market premium likely driven by optimism around Microsoft’s AI initiatives and cloud growth. The McGrew method’s higher intrinsic value accounts for stronger growth assumptions, yet the stock price still exceeds its threshold, suggesting caution for value-focused investors. #StockMarket #TechInvesting
Profitability Metrics: ROE and ROTE
Return on Equity (ROE)
ROE evaluates how effectively Microsoft generates profits from shareholders’ equity, calculated as Net Income ÷ Average Total Shareholders’ Equity × 100. Using Trailing Twelve Months (TTM) data as of March 31, 2025:
- Net Income: $96,635 million
- Average Shareholders’ Equity: ($321,891M + $268,477M) ÷ 2 = $295,184M
- ROE: ($96,635M ÷ $295,184M) × 100 = 32.73% Annualizing Q3 2025 Net Income ($25,824M × 4 = $103,296M) produces an ROE of 34.99% (CSV equity) or 33.08% (GuruFocus’s $312,293M equity). These align with external sources:
- GuruFocus: 33.08% (Q3 2025 annualized)
- CSIMarket: 35.12% (Q2 2025)
- Stock Analysis: 32.83% (FY 2024) Microsoft’s ROE of 32.73% is exceptional, well above the tech sector average (15–18%), signaling efficient capital utilization. #ROE #Profitability
Return on Net Tangible Equity (ROTE)
ROTE measures returns on tangible equity, excluding intangibles, calculated as Net Income ÷ Average Tangible Shareholders’ Equity × 100. Using TTM data:
- Net Income: $96,635M
- Average Tangible Equity: ($178,594M + $121,660M) ÷ 2 = $150,127M
- ROTE: ($96,635M ÷ $150,127M) × 100 = 64.36% Annualizing Q3 2025 data yields ROTE of 68.80% (CSV equity) or 61.36% (GuruFocus’s $168,357M). GuruFocus’s 10-year ROTE median of 68.56% corroborates these figures. Microsoft’s elevated ROTE reflects its asset-light model, where intangible assets (e.g., software IP) do not dilute returns. #ROTE #FinancialMetrics
Analysis and Implications
Microsoft’s overvaluation under both valuation methods suggests the market is factoring in ambitious growth expectations, particularly in Azure and AI-driven solutions like Copilot. The Buffett method’s conservative 5% growth rate may undervalue Microsoft’s potential, while the McGrew method’s dynamic growth better captures its trajectory, yet neither justifies the $479.86 price. Investors must decide if this premium aligns with Microsoft’s long-term prospects.
The ROE (32.73%) and ROTE (64.36%) underscore outstanding profitability. The high ROTE, nearly double the ROE, highlights Microsoft’s reliance on intangible assets, a trait of leading tech firms. Compared to peers like Apple (ROE 40%) or Amazon (20%), Microsoft’s metrics are competitive, reflecting strong management and operational excellence. #TechStocks #Earnings
Limitations
- Valuation: The 3-year FCF CAGR (3.52%) may be depressed by a FY 2023 anomaly, skewing the Buffett Valuation. The 8% discount rate is standard but may not reflect Microsoft’s specific risk profile.
- Profitability: Variations in equity averaging across sources cause minor ROE/ROTE discrepancies. Annualized Q3 2025 figures assume stable quarterly performance, which may not persist.
- Data: Analysis relies on provided CSVs, verified with Yahoo Finance and GuruFocus. Real-time DeepSearch was constrained, but data is current as of June 2025.
- Market Context: The $479.86 closing price is a snapshot, potentially influenced by AI-related market sentiment.
Microsoft’s intrinsic value estimates ($213.86–$344.10) indicate it is overvalued at $479.86, advising caution for value investors. However, its impressive ROE (32.73%) and ROTE (64.36%) affirm its financial strength, making it a compelling hold for those confident in its cloud and AI growth. As Microsoft shapes the future of technology, investors must balance its premium valuation against its robust fundamentals.
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