Microsoft’s Annual Returns Remain Strong Even With A 16.3% Cloud Growth

Summary:

  • Microsoft’s financial health and growth prospects are the focal points of this analysis, revealing a promising investment case.
  • Under the default scenario, with a 10.48% expected revenue growth rate, Microsoft offers an 8.3% potential stock price increase and a 14.2% annual return.
  • Incorporating Activision-Blizzard’s growth potential results in a 29.8% upside and a potential annual return of 21.3%.
  • Even under a conservative scenario, with a 16.3% cloud growth rate, Microsoft presents a 13.4% upside and the potential for annual returns of up to 15.8%.
  • While potential risks include significant cloud revenue declines or unprofitable ventures, Microsoft’s financial resilience and diverse business segments position it as a strong candidate for sustained growth in the technology and cloud computing sector.

French headquarters of Microsoft, Issy-les-Moulineaux, France

HJBC

Thesis

Microsoft Corporation (NASDAQ:MSFT) successfully completed its acquisition of Activision Blizzard, Inc. (ATVI) on October 13th. According to my models, this acquisition has the potential to boost Microsoft’s annual return to up to 20% from its current stock

TABLE OF ASSUMPTIONS
(Current data)
Assumptions Part 1
Equity Value 206,223.00
Debt Value 79,441.00
Cost of Debt 2.51%
Tax Rate 18.98%
10y Treasury 4.61%
Beta 1.2
Market Return 10.50%
Cost of Equity 11.68%
Assumptions Part 2
EBIT
Tax 16,950.00
D&A 13,500.00
CapEx 28,107.00
Capex Margin 13.26%
Assumption Part 3
Net Income 72,361.00
Interest 1,995.00
Tax 16,950.00
D&A 13,500.00
Ebitda 104,806.00
D&A Margin 6.37%
Interest Expense Margin 0.94%
Revenue 211,915.0

Revenue Net Income Plus Taxes Plus D&A Plus Interest
2024 $211,915.0 $73,418.80 $87,352.68 $100,852.68 $102,847.68
2025 $234,123.7 $82,765.02 $98,472.68 $111,972.68 $113,967.68
2026 $258,659.9 $93,301.00 $111,008.25 $127,486.12 $129,921.18
2027 $285,767.4 $105,178.22 $125,139.60 $143,344.35 $146,034.61
2028 $315,715.8 $118,567.41 $141,069.87 $161,182.48 $164,154.68
2029 $348,802.9 $133,661.04 $159,028.07 $181,248.48 $184,532.16
^Final EBITA^

Revenue Net Income
2024 $8,706.0 $2,166.00
2025 $9,158.7 $2,359.42
2026 $9,635.0 $2,570.12
2027 $10,136.0 $2,799.63
2028 $10,663.1 $3,049.64
2029 $11,217.5 $3,321.97

Revenue Net Income Plus Taxes Plus D&A Plus Interest
2024 $220,621.0 $78,601.03 $93,518.43 $107,573.04 $109,650.00
2025 $253,652.1 $90,966.37 $108,230.53 $122,285.15 $124,362.11
2026 $291,515.5 $105,116.51 $125,066.17 $143,637.10 $146,381.47
2027 $334,907.0 $121,297.47 $144,318.06 $165,653.24 $168,806.10
2028 $384,621.8 $139,788.28 $166,318.17 $190,820.42 $194,441.31
2029 $441,568.2 $160,905.30 $191,442.91 $219,572.92 $223,729.91
^Final EBITA^

Intelligent Cloud
2024 $87,910.0
2025 $102,239.3
2026 $118,904.3
2027 $138,285.7
2028 $160,826.3
2029 $187,041.0

Revenue Net Income Plus Taxes Plus D&A Plus Interest
2024 $220,621.0 $76,445.18 $90,888.46 $105,026.36 $107,103.32
2025 $248,407.6 $86,073.22 $102,335.60 $116,473.50 $118,550.46
2026 $279,917.2 $96,991.30 $115,316.50 $133,254.24 $135,889.42
2027 $315,674.7 $109,381.27 $130,047.39 $150,276.55 $153,248.36
2028 $356,282.3 $123,451.80 $146,776.36 $169,607.74 $172,961.84
2029 $402,430.9 $139,442.31 $165,788.05 $191,576.75 $195,365.29
^Final EBITA^


Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in MSFT over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.


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