Microsoft Corporation (MSFT)

Conclusion

Microsoft Corporation develops operating systems, server and business applications, development tools, cloud services, LinkedIn, Dynamics 365 and devices for individuals and businesses worldwide. On 2026-11-06 the share traded at 530.61 USD, giving a market capitalisation of 3.94 trillion USD.

The verdict is overvalued. The fair value band runs from 314.16 to 471.24 USD with a midpoint of 392.70 USD, a margin of safety of -26.0% at the current price. Against their own ten-year medians, the price-to-earnings ratio of 27.6 sits below its median of 34.8, but the price-to-free-cash-flow ratio of 65.7 sits well above its median of 36.7. The discounted cash flow gives 159.87 USD per share, and the fair value from historical multiples is 625.54 USD. The reverse DCF implies growth of 28.2% a year, while revenue grew 14.6% a year over five years and free cash flow per share only 4.0%.

The strongest numbers are the operating margin of 47.1%, against a ten-year median of 41.7%, the interest coverage of 56.1 times, and eight beats in eight earnings surprises. The weakest are the free cash flow conversion of 42.0% over the last twelve months, against 71.9% over five years, the price-to-free-cash-flow premium of 78.9%, and the implied growth of 28.2%, which is roughly double the five-year revenue growth.

Financial health

Financial health is green, held up by the Altman Z-score of 9.55, net debt to EBITDA of 0.31 and interest coverage of 56.1 times. The current ratio of 1.22 and quick ratio of 1.07 are adequate, and debt to equity is 0.28. The Altman model was designed for manufacturers, so its zone of safe is only a rough guide for a software company. Insolvency risk: low, about 0.02% by the estimate of the Ohlson model over one to two years. The balance sheet gives no sign of stress on any of these measures.

Earnings quality

Earnings quality is green, supported by a Beneish M-score of -2.61, which is read as unlikely to indicate manipulation, and by eight beats in eight quarters with an average surprise of 9.1%. Free cash flow conversion is 42.0% over the last twelve months but 71.9% over five years, which is the main weak point. The accrual ratio of -7.1% means cash generation exceeds reported earnings. Stock-based compensation equals 3.6% of revenue, and free cash flow after it is 47.4 billion USD. The share count fell at a compound rate of 0.4% over five years, so buybacks more than offset dilution. The Piotroski score is 6 out of 9. Estimate revisions for the next year rose by 2.8% over 90 days, with two downgrades in the last 30 days.

Profitability

Profitability is green. The gross margin of 67.7% is close to its ten-year median of 68.2%, while the operating margin of 47.1% and the net margin of 41.2% are both above their medians of 41.7% and 35.1%. Margin stability is 14.2%. ROIC of 27.0% against a WACC of 10.2% creates value, with a gap of 16.9 percentage points as given. The return on equity of 30.3% is partly lifted by leverage: the DuPont split shows a net margin of 40.3%, asset turnover of 0.44 and an equity multiplier of 1.71. The return therefore rests mainly on margins, not on debt.

Growth

Growth is green. Revenue compounded at 16.1% over three years, 14.6% over five and 13.8% over ten. Earnings per share compounded at 22.8%, 17.4% and 21.5% over the same periods. Free cash flow per share grew more slowly, at 4.1% over three years and 4.0% over five, though 11.2% over ten. Revenue rose in all ten comparable years. The consensus expects earnings per share growth of 20.6% in the next year, which is the growth the price relies on.

Valuation

Valuation is red. The price-to-earnings ratio of 27.6 is a premium of -20.5% to its ten-year median of 34.8, and enterprise value to EBITDA of 18.0 is a premium of -15.0% to a median of 21.1. The price-to-free-cash-flow ratio of 65.7 is a premium of 78.9% to a median of 36.7. The discounted cash flow gives 159.87 USD per share at a discount rate of 10.4%, and the fair value band is an order of magnitude built on fixed assumptions, not a price target. The reverse DCF implies growth of 28.2%, against revenue growth of 14.6% and free cash flow per share growth of 4.0% over five years. The dividend yield is 0.69%, with a payout of 45.1% of free cash flow.

Risks

A fall in free cash flow conversion from 71.9% to 42.0% would mean that less of the reported earnings reaches shareholders in cash, which would weaken the case at a price-to-free-cash-flow ratio of 65.7. The valuation also depends on growth: if free cash flow per share keeps rising at 4.0% a year instead of the 28.2% the price implies, the shares stay expensive. The discounted cash flow rests for 54.5% on its terminal value, so it is sensitive to the long-term assumptions. No values are unavailable. This analysis has limits: it has no debt maturity schedule and no revenue by segment, so it cannot test refinancing needs or show which business lines drive the growth.