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MICROSOFT (MSFT)

RECOMMENDATION: BUY
PRICE: $33.88 (as of 10-06-13)
1YR PRICE TARGET: $37.51 (13.51% upside including dividends)


Allen Shi
Alex Serebransky
Dillon Patel
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Key Drivers
Company Restructuring & New CEO
Greater Financial transparency: clearer reporting along two distinct categoriesDevices
& Services and Commercial Products
New engineering groups will improve product development and delivery
Shifting focus from PC-centric computing environment to computing platforms on
diverse devices, all with access to MSFT software
The new CEO will determine future direction and development of company
Nokia Acquisition
Acquisition of Nokias Devices and Services Business for $7.2 billion in September
2013, including related patents and licenses
With the growing mobile market, acquisition shows commitment to staying competitive
and indicates shift in business strategy
Potential to further penetrate smart phone market
The Cloud
Subscription revenue model with Office 365 and Azure that leads to more stable growth
Growing consumer demand for cloud service
Allows MSFT to stay competitive
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SWOT Analysis
Strengths
Worlds Largest Software Producer
Consistent and Strong Revenue Increases5.9%
CAGR from 2009-2013
Strong Intellectual Property and Patent Rights
Diverse Product Platform
New Company Operating Structure
Strong Dividend Payments: 2.8% Expected Yield
Focused Innovation, Research, and Development
High Penetration in Businesses and Education Sector
Weaknesses
Uncertainty Over the Future CEO
Increased Debt in the Fourth Quarter
Constant Legal Proceedings
Low Penetration in Global Smartphone Market 4%
Opportunities Threats
Strategic Acquisition Nokias Devices & Services
Business
Growing Cloud Market (Windows365 and Azure)
Superior Consumer Relations Free Updates and New
Operating Systems
Growing Demand for Smart Phones
Lucrative Partnerships and Collaborationi.e., U.S.
Defense and Military
Highly Competitive Mobile and Tablet Market
Declining Desktop Industry
High Pressure from Nintendo and Sony via Gaming
Innovations
Open Source Projects Linux and Open Source Office
Increased Availability and Access to Pirated MSFT
Software
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Financial Analysis
Despite recent
investments, MSFT
still has significant on-
hand cash
Consistent revenue and
sales growth
5.9% CAGR from
2010-2013
High gross margins
73.99% in 2013
Consistently high
dividend yield
Market Cap 288,361.90 Share Price (10/6/13) $33.88
Shares Outstanding 8,360.74 52 Week Range $26.26-36.43
2014E
USD
06/30/2013
USD
06/30/2012
USD
06/30/2011
USD
06/30/2010
USD
- 223,854.0 217,441.0 241,923.9
83,109.40 77,849.0 73,723.0 69,950.0 61,989.0
15,600.0 11,944.0 11,921.0 5,939.0
31,179.93 31,236.0 25,405.0 30,903.0 27,671.0
226,014.8 205,016.8 176,729.0 168,004.7
Net Income 22,505.22 21,863.0 16,978.0 23,150.0 18,760.0
2.7 2.6 2.0 2.7 2.1
Operating Cash Flow 31,121.50 28.8 31.6 27.0 24.1
Free Cash Flow 25,926 24,576.0 29,321.0 24,639.0 22,096.0
Free Cash Flow Per Share 2.9 3.5 2.9 2.5
12.6 13.4 15.3 9.7 11.0
7.13 7.2 8.1 5.7 6.1
0.5 0.5 0.4 0.2
-2.01 -1.65 -2.01 n/a
16.0 16.1 20.9 10.7
19.8 18.0 20.9 12.9
73.99% 76.22% 77.73% 80.00%
40.12% 34.46% 44.18% 44.64%
0.9 0.8 0.6 0.5
2.66% 2.62% 2.46% 2.26%
Net Sales or Revenues
Total Debt
EBITDA
MICROSOFT CORPORATION (MSFT)
Annual Ratios
Valuation Measures
Market Cap
Enterprise Value
Enterprise Value/ EBITDA
Enterprise Value
Valuation
Price/Earnings
Gross Margin
EBITDA Margin
Long Term Debt / Equity
Total Debt / Equity
Liquidity Leverage
Credit Statistics
Total Debt / EBITDA
Net Debt / EBITDA
EPS
Dividend Ratios
Dividend Per Share
Dividend Yield
Profitability Ratios
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*All values, excluding share price and EPS, are in $million.
Potential Risks
Nokia Acquisition
Low number of available apps of Microsoft Phone and continued low
interest from app developers
Market consensus that Nokia was overvalued ($7.2 billion acquisition)
Inability to keep up with the fast-paced mobile market trends
Industry Trends
Higher demand in tablets and mobile devices, as oppose to traditional PCs
(where MSFT gets over half its revenues)
PC Shipments fell 7.6% year over year in Q3, which, while poor, beat
estimates of an 11.4% decrease
Internal Affairs
Potentially turbulent CEO transition
Declining relevance with Bing and Xbox in their respective industry
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Comparables Analysis
Microsoft
Comparable Companies Analysis ("Comps") DIRECTIONS: You only need to complete the fields that are shaded. All of the multiples and other statistics are already entered as formulas in the applicable fields
Share Price Fully Market Enterprise Net
Comparable Companies
4
Share Price % of Diluted Value (Mil) Value
1
(Mil) Debt Revenue
3
EBITDA
3
Equity
Ticker (US$)
1
52 week high
1
Shares (FY12)
2
10/6/13 10/6/13 10/6/13 LTM
1
2013E 2014E LTM
1
2013E 2014E Beta
1
Oracle ORCL 33.21 91.2% 2554.5 84,834 136,802 51,969 37371.0 37180.0 38352.1 17535.0 17363.0 19528.2 1.3
SAP AG SAP 73.44 86.8% 192.0 14,100 68,101 54,000 16638.0 16772.8 18299.8 5126.0 5653.9 6494.0 1.4
CA Technologies CA 29.57 94.1% 455.6 13,473 12,297 -1,176 4626.0 4643.0 4461.9 1837.0 1834.0 1670.3 1.4
IBM IBM 184.10 85.3% 1095.4 201,668 225,560 23,892 102383.0 102356.7 104547.9 23949.0 27426.4 29498.1 0.7
Citrix CTXS 70.48 91.3% 187.4 13,207 12,507 -700 2784.7 2974.8 3357.0 610.4 937.4 1059.4 2.2
Microsoft MSFT 33.88 93.0% 8330.0 282,219 220,797 -61,422 77849.0 77849.0 83109.4 30519 30519 30948.64 0.8
Enterprise value as a multiple of
Comparable Companies Revenue (x) EBITDA (x)
Ticker LTM 2013E 2014E 2012 2013E 2014E LTM 2013E 2014E LTM 2013E 2014E
Oracle ORCL 14.4 14.9 11.4 2.3 2.23 2.91 3.7 3.7 3.6 7.8 7.9 7.0
SAP AG SAP 24.2 22.3 19.9 3.0 3.29 3.69 4.1 4.1 3.7 13.3 12.0 10.5
CA Technologies CA 13.9 12.4 10.1 2.1 2.38 2.94 2.7 2.6 2.8 6.7 6.7 7.4
IBM IBM 12.1 10.9 10.0 15.3 16.89 18.39 2.2 2.2 2.2 9.4 8.2 7.6
Citrix CTXS 33.9 22.8 19.9 2.1 3.09 3.55 4.5 4.2 3.7 20.5 13.3 11.8
Mean 19.7 16.7 14.2 4.96 5.58 6.30 3.4 3.4 3.2 11.5 9.6 8.9
Median 14.4 14.9 11.4 2.30 3.09 3.55 3.7 3.7 3.6 9.4 8.2 7.6
High 33.9 22.8 19.9 15.3 16.89 18.39 4.5 4.2 3.7 20.5 13.3 11.8
Low 12.1 10.9 10.0 2.1 2.23 2.91 2.2 2.2 2.2 6.7 6.7 7.0
Microsoft MSFT 12.4 12.8 12.6 2.7 2.65 2.69 2.8 2.8 2.7 7.2 7.2 7.1
Possible Sources
1
Yahoo Finance
2
Most Recent Company 10-K
3
Thomson Reuters estimates <----------------- EBITDA Multiples ------------------>
4 You may decide that there are fewer than 6 good comparables 6.2 7.2 8.2 9.2 10.2
2013 EBITDA (est): 30,519.00 Implied EV: 189,956.39 220,475.39 250,994.39 281,513.39 312,032.39
Assumed # shares (Mill): 8330.0 Implied MCAP: 251,378.39 281,897.39 312,416.39 342,935.39 373,454.39
Implied Share Price: 30.18 33.84 37.51 41.17 44.83
Price / Earnings (x) EPS
3
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