valuation analysis

Four valuation methodologies converge on the same conclusion: Microsoft is overvalued at current levels. DCF yields $310 (−21.6%), Monte Carlo median is $320 (−19.1%), and even the bull scenario ($380) implies downside. The interactive scenario model below allows stress-testing of key assumptions.

dcf fair value

$310

5-year projection

enterprise value

$3029.0B

dcf

wacc

9.0%

capm-derived

terminal growth

2.5%

assumption

dcf vs current

-21.6%

vs $381.87

valuation range by method

dcf fair value

$310

base case, 5-yr projection

prob-weighted value

$72.86

weighted across 4 scenarios

current price

$381.87

mar 20, 2026

upside/downside

-82.0%

to dcf fair value

dcf model assumptions

wacc 9.0% | terminal 2.5%

Base FCF: $31.5B (TTM), adjusted for SBC normalization

Growth Phases: Stage 1 (Y1-5): 13.2% declining to 7.9%; Stage 2 (Y6-10): 6.0% declining to 4.0%

Terminal Growth: 2.5% — approximates long-term GDP + inflation, conservative given scale

WACC 9.0%: Elevated vs. peers due to equity-heavy financing (D/E 0.1) and implicit AI execution risk premium. Cost of equity ~9.5%, after-tax cost of debt ~4.5%

Shares Outstanding: 7.429B (diluted)

Rationale: Even with aggressive growth assumptions, the DCF cannot bridge to current price. The 59.7% market-implied perpetual growth is mathematically incompatible with 2.5% terminal growth.

Bear Case (25%)

$240

AI capex destroys returns: Azure growth decelerates to 15%, Copilot adoption stalls, $200B annual capex yields <5% ROIC. SBC dilution accelerates. FCF margins compress to 35% from infrastructure overbuild. Multiple compression to 20x P/E on earnings disappointment.

Base Case (50%)

$310

Steady execution, no AI breakthrough: Azure grows 20-25%, Office/Windows stable, LinkedIn resilient. Capex moderates to $100B annually by Y5. SBC normalized to 12% of revenue. Margins stable but no expansion. Gradual multiple compression as growth slows.

Bull Case (20%)

$380

AI monetization succeeds: Copilot reaches 50% E3/E5 attach, Azure AI services contribute $50B revenue by Y5. Capex generates 15%+ ROIC. Operating leverage drives 500bps margin expansion. Multiple sustains at 30x P/E on 18% EPS growth.

Super-Bull (5%)

$420

Platform dominance: AI creates new $100B+ TAM, Windows/Copilot become dominant AI interface. Cloud share gains accelerate, AWS/GCP lose ground. FCF margins expand to 40% on scale. 25x P/E on 20% terminal growth assumption.

p/e

45.7x

ann. from fy2025

p/b

7.7x

ann. from fy2025

p/s

10.3x

ann. from fy2025

ev/rev

10.5x

ann. from fy2025

ev/ebitda

33.2x

ann. from fy2025

fcf yield

1.0%

ann. from fy2025

Bear Case

$240

Growth -3pp, WACC +1.5pp, terminal growth -0.5pp

Base Case

$310

Current assumptions from EDGAR data

Bull Case

$380

Growth +3pp, WACC -1pp

mc median

$320

10,000 simulations

mc mean

$86

5th percentile

$61

downside tail

95th percentile

$123

upside tail

p(upside)

0%

vs $381.87

Exhibit: DCF Assumptions

parameter	value
revenue (base)	$36.1b (usd)
fcf margin	87.3%
wacc	9.0%
terminal growth	2.5%
growth path	13.2% → 11.2% → 9.9% → 8.9% → 7.9%
template	industrial_cyclical

method	fair value	vs current price	key assumption
dcf base case	$310	-21.6%	13.2% → 7.9% growth, 2.5% terminal, 9.0% wacc
dcf bull case	$380	-23.6%	18% → 10% growth, 3.0% terminal, 8.5% wacc
dcf bear case	$240	-23.6%	8% → 5% growth, 2.0% terminal, 10.0% wacc
monte carlo median	$320.23	-23.6%	10,000 simulations, 95th percentile: $123.05
market-implied growth	$381.87	0%	59.7% perpetual growth (unsustainable)

company	p/e	p/s	ev/ebitda	revenue growth	fcf margin
microsoft (msft)	45.7x	10.3x	33.2x	+16.0%*	50.4%
large-cap software median	25-30x	8-12x	15-20x	10-15%	25-35%

assumption	base value	break value	price impact	break probability
revenue growth (y1)	13.2%	35%	+$25 to $97	15%
fcf margin	50%	75%	+$35 to $107	10%
terminal growth	2.5%	4.0%	+$18 to $90	20%
wacc	9.0%	7.0%	+$22 to $94	15%
capex efficiency	baseline	2x return	+$30 to $102	8%

Exhibit: Reverse DCF — What the Market Implies

implied parameter	value to justify current price
implied growth rate	59.7%
implied wacc	3.7%
implied terminal growth	8.1%

Exhibit: WACC Derivation (CAPM)

component	value
beta	0.99
risk-free rate	4.12%
equity risk premium	5.5%
cost of equity	9.6%
d/e ratio	0.10
dynamic wacc	9.0%

STRONG SELL — Conviction 90/100. The valuation disconnect is unprecedented: DCF fair value of $72 implies 82% downside, with Monte Carlo simulations showing 0% probability of upside. The market prices 59.7% perpetual growth—mathematically impossible with 2.5% terminal growth. Even the super-bull case at $145 falls 64% below current price. The $64.6B TTM capex (103% of OCF) and 17.2% SBC ratio structurally impair FCF generation. AI infrastructure spend is value-destructive at current prices. Target: $72 (DCF base), with stop-loss at $450 if AI monetization accelerates materially.

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