Enjoying this bite?
Sign in (free) to track this channel, unlock new bites the moment they drop, and search every summary we've ever made.
Source: YouTube. Summary is AI-generated from the video's captions and may contain errors. It does not represent the views of TubeBite, the creator, or YouTube. Watch the original before relying on anything important.
SUMMARY
Parkev Tatevosian, CFA, provides a detailed discounted cash flow valuation of Microsoft, analyzing its recent price decline and future cash flow projections. He concludes that while Microsoft is not undervalued, it remains a compelling buying opportunity given its business quality and long-term prospects.
MAIN POINTS
- Microsoft stock has declined 14% at the start of 2026, prompting an analysis of its fair value using a discounted cash flow model.
- The model estimates annual free cash flow for Microsoft from 2024 onward, adjusting for the time value of money.
- Significant capital investment in AI and data centers is expected to keep Microsoft's free cash flow relatively low until 2028.
- After 2028, free cash flow is projected to rise sharply, reaching $248 billion by 2035 as AI investments taper off.
- A weighted average cost of capital of 10.1% is used, reflecting higher market risk premiums due to global geopolitical tensions.
- The calculated fair value for Microsoft is $419 per share, close to the market price, indicating the stock is fairly valued but still a strong buying opportunity.
DETAILED ANALYSIS
Microsoft has experienced a 14% decline in its stock price at the start of 2026, raising questions about whether the stock is now undervalued. A detailed discounted cash flow (DCF) analysis is conducted to estimate the company's intrinsic value. The model projects Microsoft's free cash flow for each year from 2024 onward, incorporating the time value of money by discounting future cash flows to their present value.
The analysis highlights that Microsoft's free cash flow will remain subdued through 2028 due to substantial investments in artificial intelligence and the construction of data centers, with capital expenditures reaching an estimated $190 billion in 2026 alone. This period of heavy investment is expected to suppress cash flow growth, but by 2029, the company is anticipated to shift from expansion to maintenance of its infrastructure, resulting in a significant increase in free cash flow. Projections show free cash flow rising from $68 billion in 2028 to $150 billion in 2029, and continuing to grow to $248 billion by 2035.
To discount these future cash flows, a weighted average cost of capital (WACC) of 10.1% is used, based on an after-tax cost of debt of 5.5%, a cost of equity of 10.9%, a beta of 1.05, and a risk-free rate of 4.6%. The market risk premium is set at 6%, reflecting heightened geopolitical risks and global volatility. The capital structure assumption is 15% debt and 85% equity.
After adjusting for non-operating assets and debt, the DCF model yields a fair value of $419 per share for Microsoft as of May 19th, compared to a market price of $417. This suggests that Microsoft is fairly valued rather than undervalued. However, the analysis emphasizes that buying a high-quality business at a fair price remains an attractive opportunity, reinforcing Microsoft’s status as a strong long-term investment despite the lack of a discount.
LINKS
- YouTube channel membership for exclusive perks and spreadsheets.
- Motley Fool Stock Advisor special offer.
- Book: Make Money Buying and Selling Stocks: A 6-Step Framework for Evaluating Publicly Traded Companies.
- Fiscal.ai investment research platform with a discount for viewers.
- Webull investing platform with bonus shares offer.
- Substack newsletter subscription for monthly updates.