Microsoft Corporation share closed the day at $127.13 with a total market capitalization just shy of a trillion dollars. The entire equity of the firm was worth $245 b some time in 2008. The growth has been both phenomenal and unprecedented because of the products it was dealing with and sheer size.
Revenues in 2008 were $60 b, and comprised the following.
In 2018 as revenues nearly doubled, the segments have changed.
The intelligent cloud has been the savior for Microsoft which experimented with many things using cash flows from Office and Windows. The elusive growth has been restored at least for sometime. Operating profits and (pretax) free cash flows to firm were $35 b in 2018. The growth in pretax fcff was 8.5% and 12.4% during the last 5 and 10 years respectively. Pretty decent given Microsoft's size of operations.
There were at least 2 major acquisitions in the past decade. Skype was bought at $8.6 in October 2011, and LinkedIn for $27 b in December 2016. Taxes in 2018 were exceptional; Microsoft is capable of $25 b aftertax fcff each year. Is 40x fcff a fair price for Microsoft? I am not sure. Apple is making nearly twice free cash flows, and yet is priced similar to Microsoft. But then Apple is banking on just one product, iPhone. Microsoft has a better product mix; Office and Windows generate steady free cash flows.
Even with a 10% growth for the next 5 years, and then moving towards a steady growth state in year 10, Microsoft may not give 10% return. If you are going to be ok with that, you might as well be ok with the S&P-500 with a far lower risk.
Microsoft has done well, and it is likely to do well in terms of its business and operations. But the stock is also not coming cheap.
Let's see again the numbers coming up for the year ending June 2019.
