Microsoft DCF Analysis

Here are the estimates of Microsoft free cash flow on a year by year basis.

Free cash flow per year:
2007 - 14.5 billion
2008 - 16 billion (estimate )
2009 - 16 billion ( estimate )
2010 - 17.5 billion ( estimate )
2011 - 19 billion ( estimate )
Terminal market cap - 366 billion

Discounted at 10% per year to now:

2007 - 14.5 billion
2008 - 14.55 billion
2009 - 13.22 billion
2010 - 13.15 billion
2011 - 12.98 billion

Terminal market cap - 250 billion

Summing up: The present value is 318 billion.The current market value is 290 billion. The upside is about 10% from current values.

The downside and caveat to this estimate are as follows:

1. Stock dilution because of heavy payments to management and employees
2. The cost of competing with Google. This could be a drain on the cash flow with XBox and other emerging businesses continuing to be a drain on cash.

If Microsoft is able to meet the EPS estimate of $1.70/share in FY2008, the share price can presumably trade in the $33-35 range. Microsoft has seen a P/E compression in the past few years as its earning growth has slowed down. The above share price range is with the current P/E. Further P/E compression to the mid teens can make the stock price stagnate at current levels.