microsoft msft - research-doc.credit-suisse.com
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Microsoft Strong End to FY21, Delivering Growth while Continuing Investments in Strategic Opportunities
MSFT
Target price (12M, US$)
320.00
Outperform Software | Earnings
Event: MSFT reported F4Q21 results with revenue $46.2b vs cons. $44.1b, op profit of
$19.1b vs cons. $17.3b and non-GAAP EPS of $2.17 vs. consensus $1.91. Our FY22E
non-GAAP EPS is now $8.69 respectively vs prior $8.31.
Investment Case: Commercial bookings FXN grew +25% YOY with commercial RPO the
standout coming in at $141b with FXN growth of +31% YOY, both results were driven by
a combination of strong execution across core annuity sales motions and an increase in the
number of large, long-term Azure contracts. F4Q revenue outperformance was driven by
strength across PBP & IC, and to a lesser extent MPC. Azure revenue FXN growth +45%
compares to consensus +42% and +46% in F3Q, driven by strong demand for
consumption-based services. Within PBP, outperformance was boosted by O365
Commercial (+20% YOY FXN), Dynamics 365 (+42% YOY FXN) and Linkedin (+42%
YOY FXN) with sessions +30% YOY and record engagement. The beat in MPC was
driven by Search advertising revenue (+49% YOY FXN) on improved customer advertising
spend and Gaming revenue (+7% YOY FXN, Xbox hardware revenue +163% YOY FXN
on continued demand for Xbox Series X|S). F1Q revenue guidance was 3% above CSe
and ahead on each business segment (excluding the Win 11 rev deferral impact). Mgmt.
expects continued healthy growth in commercial bookings on a declining expiry base even
against the strong prior year comp with Azure growth expected to remain stable on a
sequential basis. F1Q gross margins and FY22 op. margins are expected to improve
sequentially, ex. accounting change impacts. Our price target increases to $320 from
$300 as our FY22 estimates rise and serve as a higher baseline for future growth. We
maintain our Outperform rating for MSFT shares based on the following points: (1) one of
likely hybrid cloud winners given broad portfolio of on-prem server products, public cloud
and SaaS applications, (2) rising Azure profitability and (3) continued success of O365.
Valuation: Our $320 target price implies a CY22 P/E multiple of 35.5x (excl. SBC). Risks
include macro volatility and competition from other cloud providers.
27 July 2021
Equity Research
Americas | United States
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS,
LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could
affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Previous target price (12M, US$) 300.00
Price (27 Jul 21, US$) 286.54
52-week price range 289.67 - 200.39
Enterprise value (US$ m) 2,202,019
Research Analysts
Stephen Ju
212 325 8662
Marco Iaboni
212 325 4552
Radi Sultan, CFA
212 538 8137
Financial and valuation metrics
Year 6/19A 6/20A 6/21E 6/22E EPS (Excl. ESO) (US$) 5.26 6.34 8.67 9.43 EPS (CS adj., ) 4.75 5.77 7.97 8.69 Prev. EPS (CS adj., US$) - - 7.73 8.31 P/E (CS adj.) (x) 60.3 49.7 35.9 33.0 P/E rel. (CS adj., %) - 154.6 155.4 158.4 Revenue (US$ m) 125,843.0 143,015.0 168,088.0 192,060.6 Net Debt (US$ m) 60,822 49,751 43,922 23,698 OCFPS (US$) 6.73 7.90 10.09 11.74 P/OCF (x) 42.6 36.3 28.4 24.4
Number of shares (m) 7,531.57 Price/Sales (x) 12.82 BV/share (Next Qtr., US$) 18.7 P/BVPS (x) 16.6 Net debt (Next Qtr., US$ m) 43,922.0 Dividend (current, US$) - Dividend yield (%) 0.18
Source: Company data, Refinitiv, Credit Suisse estimates
Share price performance
On 27-Jul-2021 the S&P 500 INDEX closed at 4401.46Daily
Jul28, 2020 - Jul27, 2021, 07/28/20 = US$202.02
Quarterly EPS Q1 Q2 Q3 Q4 2020A 1.38 1.51 1.40 1.46 2021E 1.82 2.03 1.95 2.17 2022E 2.03 2.14 2.13 2.40
27 July 2021
Microsoft 2
Microsoft (MSFT) Analyst: Stephen Ju Price (27 Jul 2021): US$286.54 Target Price: (from 300.00) 320.00 Rating: Outperform Income Statement 6/19A 6/20A 6/21E 6/22E
Revenue (US$ m) 125,843.0 143,015.0 168,088.0 192,060.6
EBITDA 54,641.0 65,755.0 81,602.0 96,774.3
Operating profit 42,959.0 52,959.0 69,916.0 78,748.6
Recurring profit 43,688.0 53,036.0 70,482.0 78,748.6
Cash Flow 6/19A 6/20A 6/21E 6/22E
Cash flow from operations 52,185 60,675 76,740 88,492
CAPEX (13,925) (15,441) (20,622) (25,165) Free cashflow to the firm 38,260 45,234 56,118 63,327
Cash flow from investments (15,773) (12,223) (27,577) (25,165)
Net share issue(/repurchase) (18,401) (21,625) (25,692) (26,511) Dividends paid (13,811) (15,137) (16,521) (16,591) Issuance (retirement) of debt 0 0 0 0 Other (4,675) (9,269) (6,273) 0 Cashflow from financing activities (36,887) (46,031) (48,486) (43,102) Effect of exchange rates (115) (201) (29) 0 Changes in Net Cash/Debt 3,472 11,071 5,829 20,224
Net debt at end 60,822 49,751 43,922 23,698
Balance Sheet 6/19A 6/20A 6/21E 6/22E
Assets Other current assets 132,609 134,433 129,503 126,512 Total current assets 175,552 181,915 184,406 202,540
Total assets 286,556 301,311 333,779 359,052
Liabilities Short-term debt 5,516 3,749 8,072 8,072 Total current liabilities 69,420 72,310 88,657 87,168 Long-term debt 66,662 59,578 50,074 50,074 Total liabilities 184,226 183,007 191,791 190,508 Shareholder equity 102,330 118,304 141,988 168,545 Total liabilities and equity 286,556 301,311 333,779 359,052
Net debt 60,822 49,751 43,922 23,698
Per share 6/19A 6/20A 6/21E 6/22E
No. of shares (wtd avg) 7,752 7,681 7,606 7,541 CS adj. EPS 4.75 5.77 7.97 8.69 Prev. EPS (US$) - - 7.73 8.31 Dividend (US$) 0.00 0.00 0.00 0.00 Free cash flow per share 4.94 5.89 7.38 8.40
Earnings 6/19A 6/20A 6/21E 6/22E
Sales growth (%) 14.0 13.6 17.5 14.3 Net profit growth (%) 21.7 20.2 37.0 8.1 EPS growth (%) 22.1 20.6 36.7 8.9 EBIT margin (%) 34.1 37.0 41.6 41.0
Valuation 6/19A 6/20A 6/21E 6/22E
EV/Sales (x) 17.63 15.44 13.10 11.36 EV/EBIT (x) 51.7 41.7 31.5 27.7 P/E (x) 60.3 49.7 35.9 33.0
Quarterly EPS Q1 Q2 Q3 Q4 2020A 1.38 1.51 1.40 1.46 2021E 1.82 2.03 1.95 2.17 2022E 2.03 2.14 2.13 2.40
Company Background
Microsoft provides cloud computing services, desktop and server
management tools, productivity software applications, enterprise services,
consumer electronics, operating systems, and personal computers to
businesses and consumers.
Blue/Grey Sky Scenario
Our Blue Sky Scenario (US$) (from 335.00) 355.00
Better than expected traction in Commercial Cloud, exceeding $110bn in
revenues in five years and continued operational efficiencies driven by
significant economies of scale result in uFCF CAGR of 13% through
FY2031 and terminal growth of 3.5%. This yields a blue sky scenario of
$355 per share.
Our Grey Sky Scenario (US$) (from 235.00) 255.00
Increased competition, especially in the public cloud vs AWS / GCP result
in uFCF CAGR of 9% through F2031 and terminal growth of 3.5%. This
yields a grey sky scenario of $255 per share.
Share price performance
On 27-Jul-2021 the S&P 500 INDEX closed at 4401.46
Daily Jul28, 2020 - Jul27, 2021, 07/28/20 = US$202.02
Source: Company data, Refinitiv, Credit Suisse estimates
27 July 2021
Microsoft 3
Investment Case: Strong End to FY21, Delivering Growth
while Continuing Investments in Strategic Opportunities
MSFT reported F4Q21 results with revenue of $46.2 billion versus consensus $44.1 billion,
operating profit of $19.1 billion versus consensus $17.3 billion, and non-GAAP EPS of $2.17
versus consensus $1.91. Our FY22 non-GAAP EPS is now $8.69 versus prior $8.31.
Commercial bookings FXN grew +25% YOY but commercial RPO was the standout coming in
at $141b with FXN growth of +31% YOY, both results were driven by a combination of strong
execution across core annuity sales motions and an increase in the number of large, long-term
Azure contracts. F4Q revenue outperformance was driven by strength across PBP & IC, and to
a lesser extent MPC. Azure revenue FXN growth +45% compares to consensus +42% and
+46% in F3Q, driven by strong demand for consumption-based services. Within PBP,
outperformance was boosted by O365 Commercial (+20% YOY FXN), Dynamics 365 (+42%
YOY FXN) and LinkedIn (+42% YOY FXN) with sessions +30% YOY and record engagement.
MPC had the slimmest beat of the segments driven by Search advertising revenue (+49% YOY
FXN) on improved customer advertising spend and Gaming revenue (+7% YOY FXN, Xbox
hardware revenue +163% YOY FXN on continued demand for Xbox Series X|S). F1Q revenue
guidance was 3% above CSe and ahead on each business segment (including the Win 11 rev
deferral impact).
F1Q revenue guidance was 3% above CSe and ahead on each business segment (including
the Win 11 rev deferral impact). Mgmt. expects continued healthy growth in commercial
bookings on a declining expiry base even against the strong prior year comp with Azure growth
expected to remain stable on a sequential basis. F1Q gross margins and FY22 op. margins are
expected to improve sequentially, ex. accounting change impacts.
Our price target increases to $320 from $300 as our FY22 estimates rise and further serve as
a higher baseline for future growth. We maintain our Outperform rating for MSFT shares based
on the following points:
One of likely hybrid cloud winners given broad portfolio of on-premise server products,
public cloud and SaaS applications.
Rising Azure profitability.
Continued success of Office 365.
27 July 2021
Microsoft 4
Changes to Estimates
In tandem with its F4Q earnings release, Microsoft provided guidance for F1Q22 for revenue of $43.3-44.2bn, COGS of $13.55-13.75bn and
Operating expenses of $11.6-11.7bn. The company also provided preliminary color for FY22 with revenue and operating income expected to
both grow double digits YOY and operating margins expected to grow YOY, excluding the impact from accounting changes. Our updated
estimates are as shown below:
Figure 1: MSFT F1Q22E and FY22E
Source: Company data, Credit Suisse estimates
Amounts in US$millions, except per share data New CSE Prior CSE Δ% Guidance New CSE Prior CSE Δ% Guidance
Total Revenue 43,659$ 42,451$ 3% $43.3 to $44.2 billion 192,061$ 186,558$ 3%
% growth y/y (%) 18% 14% 14% 12%
Productivity and Business Processes 14,604$ 14,140$ 3% $14.5 to $14.75 billion 61,703$ 60,448$ 2%
% growth y/y (%) 19% 15% 14% 14%
Intelligent Cloud 16,478$ 15,708$ 5% $16.4 to 16.65 billion 73,792$ 70,531$ 5%
% growth y/y (%) 27% 21% 23% 19%
More Personal Computing 12,577$ 12,604$ 0% $12.4 to 12.8 billion 56,565$ 55,579$ 2%
% growth y/y (%) 6% 6% 5% 3%
Total Cost of Revenue 13,669$ 13,756 -1% $13.55 to 13.75 billion 60,588$ 60,326 0%
Gross Profit 29,990$ 28,695 5% 131,473$ 126,232 4%
Gross Margin % 68.7% 67.6% 2% 68.5% 67.7%
Total Operating Expenses 11,682$ 11,699 0% $11.6 to 11.7 billion 52,724$ 51,430 3%
Operating Income 18,308$ 16,996 8% 78,749$ 74,802 5%
Operating Margin % 41.9% 40.0% 5% 41.0% 40.1%
Pro forma pretax income 18,308$ 17,184 7% 78,749$ 75,554 4%
Effective tax rate 16% 17% -6% 16% 17% 17% -1%
Pro forma Net Income 15,378$ 14,263 8% 65,544$ 62,710 5%
Pro Forma EPS Fully Diluted 2.03$ $1.88 8% 8.69$ $8.31 5%
Shares Outstanding (fully diluted) 7,565 7,567 0% 7,541 7,542 0%
Billings #DIV/0!
Cash Flow from Operations 26,443$ 21,249 24% 88,492$ 84,332 5%
Capital Expenditures (inc leases) 7,404$ 6,056 22% 27,565$ 24,237 14%
Free cash flow 19,039$ 15,193 25% 60,927$ 60,095 1%
FY2022F1Q22
27 July 2021
Microsoft 5
F4Q21 Reported Results
Microsoft F4Q revenue of $46.15bn (+21% year over year) compares to $44.13bn Street and $43.6-44.5bn guidance. Non-GAAP Operating
Income of $19.1bn surpassed Street $17.3bn and non-GAAP EPS of $2.17 beat Street $1.91.
Figure 2: MSFT F4Q21
Source: Company data, Factset, Credit Suisse estimates
PBP revenue of $14.7bn surpassed street $13.9bn. PBP’s outperformance was driven by a
combination of Office 365 and LinkedIn (42% year over year CC vs +23% last q). Office 365
Commercial revenue came in +20% year over year CC driven by Commercial seat growth
(+17% year over year) fueled by an acceleration in small and medium business and frontline
worker offerings.
IC revenue of $17.4bn came in above street $16.3bn. Azure revenue CC growth +45% year
over year compares to Street estimates for +42% and +46% recorded in F3Q. Factors driving
the outperformance included strong demand for consumption-based services and an increase in
EMS seats up 29% year of year to over 190mm seats.
MPC revenue of $14.1bn surpassed street $13.7bn. MPC’s strength was driven by Search
advertising revenue up 49% year over year CC on improved customer advertising spend.
Gaming revenue was up 7% year over year CC with Xbox hardware revenue up 163% year
over year CC (continued demand for Xbox Series X|S).
MSFT Actuals vs CSE / Consensus
Actual CSE Δ% Cons Δ% Guidance
Total Revenue 46,152$ 44,140 5% 44,128 5% $43.6 to $44.5 billion
% growth y/y (%) 21% 16% 16%
Productivity and Business Processes 14,691$ 13,926 5% 13,929 5% $13.80 to $14.05 billion
% growth y/y (%) 25% 18% 19%
Intelligent Cloud 17,375$ 16,337 6% 16,326 6% $16.2 to 16.45 billion
% growth y/y (%) 30% 22% 22%
More Personal Computing 14,086$ 13,878 2% 13,742 2% $13.6 to 14.0 billion
% growth y/y (%) 9% 7% 6%
Total Cost of Revenue 13,991$ 13,823 1% 13,706 2% $13.7 to 13.9 billion
Gross Profit 32,161$ 30,317 6% 30,392 6%
Gross Margin % 69.7% 68.7% 1% 68.9% 1%
Total Operating Expenses 13,066$ 13,154 -1% 13,058 0% $13.1 to 13.2 billion
Operating Income 19,095$ 17,163 11% 17,335 10%
Operating Margin % 41.4% 38.9% 6% 39.3% 5%
Pro forma pretax income 19,405$ 17,351 12% 17,274 12%
Effective tax rate 15% 16% 16% 16%
Pro forma Net Income 16,458$ 14,575 13% 14,432 14%
Pro Forma EPS Fully Diluted 2.17$ $1.92 13% $1.91 14%
Shares Outstanding (fully diluted) 7,581 7,582 0% 7,556 0%
Billings
Cash Flow from Operations 22,710$ 19,453 17% 20,318 12%
Capital Expenditures 7,300$ 6,198 18% N/A N/A
Capital Expenditures (ex leases) 6,452$ 5,517 17%
Free cash flow 15,410$ 13,255 16% 13,979 10%
F4Q21
27 July 2021
Microsoft 6
Valuation
In-line with the valuation methodology we have used with the rest of our coverage universe, we
have based our target price on a DCF, which suggests $320 versus prior $300. We have used
a weighted average cost of capital of 8.3% and a terminal growth rate expectation of 3.5%.
Figure 3: MSFT Discounted Cash Flow Analysis
Source: Company data, Credit Suisse estimates
Our blue sky scenario is based on Microsoft experiencing better than expected traction in
Commercial Cloud, exceeding $110bn in revenues in five years and continued operational
efficiencies driven by significant economies of scale resulting in uFCF CAGR of 13% through
FY2031 and terminal growth of 3.5%. This yields a blue sky price of $355 per share.
Our grey sky scenario is based on Microsoft facing increased competition, especially in public
cloud vs. AWS & GCP, resulting in uFCF CAGR of 9% through F2031 and terminal growth of
3.5%. This yields a grey sky price of $255 per share
Risks to target price for MSFT shares include macroeconomic uncertainty and growing
competitive threats in the hybrid cloud space.
Target Price
HISTORIC FORECAST PERIOD TRANSITION PERIOD TERMINAL
2014A 2015A 2016A 2017A 2018A 2019A 2020A 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E Perpetuity
Period 0 1 2 3 4 5 6 7 8 9 10 11
Current risk-free rate of return 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.2% 1.4% 1.6% 1.8% 2.0% 2.2% 2.4% 2.6% 3.0%
Beta 1.09 1.09 1.09 1.09 1.09 1.09 1.09 1.09 1.09 1.08 1.07 1.06 1.05 1.04 1.03 1.02 1.01 1.00
Equity Risk Premium 4.9% 4.9% 4.9% 4.9% 4.9% 4.9% 4.9% 4.9% 4.9% 4.9% 5.0% 5.0% 5.1% 5.1% 5.2% 5.2% 5.3% 5.3%
Cost of equity 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.5% 6.7% 6.9% 7.1% 7.3% 7.5% 7.7% 7.9% 8.3%
FCF Growth Rate 16.3% 16.3% 26.8% 15.7% 16.0% 13.0% 11.00% 10.00% 10.0% 10.0% 10.0% 10.0% 3.5%
Discount Factor 1.00 1.00 1.07 1.14 1.22 1.30 1.40 1.50 1.62 1.75 1.89
Unlevered Free cash flow ($M) 30,714.5 35,716 41,525 52,674 60,927 70,675 79,863 88,648 97,512 107,264 117,990 129,789 142,768 147,765 3,110,834
NPV of Free cash flow ($M) 52,674 60,927 66,337 70,230 72,901 74,854 76,721 78,493 80,161 81,720 1,644,921
Cumulative NPV of FCF ($M) 52,674 113,601 179,938 250,167 323,068 397,922 474,644 553,136 633,298 715,017 2,359,938
Cumulative NPV of FCF ($M) 2359937.97
Shares outstanding (M) 7,581
NPV/Share of FCF 311.30
(Net Cash) / Share 8.41$
Total NPV/Share 320$
Current price / Share $287
Upside / Downside Potential 11%
27 J
uly 2
021
Micro
soft
7
Figure 4: MSFT Income Statement
Source: Company data, Credit Suisse estimates
FY2018 Sep '18 Dec '18 Mar '19 Jun '19 FY2019 Sep '19 Dec '19 Mar '20 Jun '20 FY2020 Sep '20 Dec '20 Mar '21 Jun '21 FY2021 Sep '21 Dec '21 Mar '22 Jun '22 FY2022
Full Year F1Q19A F2Q19A F3Q19A F4Q19A Full Year F1Q20A F2Q20A F3Q20A F4Q20A Full Year F1Q21A F2Q21A F3Q21 F4Q21 Full Year F1Q22 F2Q22 F3Q22 F4Q22 Full Year
Non-GAAP Income Statement
Total Revenue 110,360 29,084 32,471 30,571 33,717 125,843 33,055 36,906 35,021 38,033 143,015 37,154 43,076 41,706 46,152 168,088 43,659 48,745 47,645 52,012 192,061
growth % (y/y) 14.3% 18.5% 12.3% 14.0% 12.1% 14.0% 13.7% 13.7% 14.6% 12.8% 13.6% 12.4% 16.7% 19.1% 21.3% 17.5% 17.5% 13.2% 14.2% 12.7% 14.3%
Total Cost of Revenue 38,353 9,905 12,423 10,170 10,412 42,910 10,406 12,358 10,975 12,339 46,078 11,002 14,194 13,045 13,991 52,232 13,669 16,092 15,038 15,789 60,588
growth % (y/y) 11.9% 19.7% 12.3% 9.7% 6.9% 11.9% 5.1% (0.5)% 7.9% 18.5% 7.4% 5.7% 14.9% 18.9% 13.4% 13.4% 24.2% 13.4% 15.3% 12.9% 16.0%
Gross Profit 72,007 19,179 20,048 20,401 23,305 82,933 22,649 24,548 24,046 25,694 96,937 26,152 28,882 28,661 32,161 115,856 29,990 32,653 32,607 36,224 131,473
Gross Margin % 65.2% 65.9% 61.7% 66.7% 69.1% 65.9% 68.5% 66.5% 68.7% 67.6% 67.8% 70.4% 67.0% 68.7% 69.7% 68.9% 68.7% 67.0% 68.4% 69.6% 68.5%
Operating Expenses
Research and development 14,726 3,977 4,070 4,316 4,513 16,876 4,565 4,603 4,887 5,214 19,269 4,926 4,899 5,204 5,687 20,716 5,352 5,787 5,802 6,149 23,090
% of revenues 13.3% 13.7% 12.5% 14.1% 13.4% 13.4% 13.8% 12.5% 14.0% 13.7% 13.5% 13.3% 11.4% 12.5% 12.3% 12.3% 12.3% 11.9% 12.2% 11.8% 12.0%
Sales and marketing 17,469 4,098 4,588 4,565 4,962 18,213 4,337 4,933 4,911 5,417 19,598 4,231 4,947 5,082 5,857 20,117 5,015 5,939 6,092 6,809 23,855
% of revenues 15.8% 14.1% 14.1% 14.9% 14.7% 14.5% 13.1% 13.4% 14.0% 14.2% 13.7% 11.4% 11.5% 12.2% 12.7% 12.0% 11.5% 12.2% 12.8% 13.1% 12.4%
General and administrative 4,754 1,149 1,132 1,179 1,425 4,885 1,061 1,121 1,273 1,656 5,111 1,119 1,139 1,327 1,522 5,107 1,315 1,484 1,421 1,559 5,779
% of revenues 4.3% 4.0% 3.5% 3.9% 4.2% 3.9% 3.2% 3.0% 3.6% 4.4% 3.6% 3.0% 2.6% 3.2% 3.3% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
Total Operating Expenses 36,949 9,224 9,790 10,060 10,900 39,974 9,963 10,657 11,071 12,287 43,978 10,276 10,985 11,613 13,066 45,940 11,682 13,210 13,314 14,517 52,724
growth % (y/y) 12.0% 7.9% 6.7% 8.7% 9.4% 8.2% 8.0% 8.9% 10.0% 12.7% 10.0% 3.1% 3.1% 4.9% 6.3% 4.5% 13.7% 20.3% 14.6% 11.1% 14.8%
Operating Income 35,058 9,955 10,258 10,341 12,405 42,959 12,686 13,891 12,975 13,407 52,959 15,876 17,897 17,048 19,095 69,916 18,308 19,442 19,293 21,706 78,749
growth % (y/y) 19.5% 29.2% 18.2% 24.7% 19.5% 22.5% 27.4% 35.4% 25.5% 8.1% 23.3% 25.1% 28.8% 31.4% 42.4% 32.0% 15.3% 8.6% 13.2% 13.7% 12.6%
Operating Margin % 31.8% 34.2% 31.6% 33.8% 36.8% 34.1% 38.4% 37.6% 37.0% 35.3% 37.0% 42.7% 41.5% 40.9% 41.4% 41.6% 41.9% 39.9% 40.5% 41.7% 41.0%
Depreciation, amortization, and other 10,261 2,837 2,995 2,926 2,924 11,682 2,971 3,203 3,118 3,504 12,796 2,645 2,761 2,936 3,344 11,686 4,453 4,387 4,764 4,421 18,026
Adj. EBITDA 45,319 12,792 13,253 13,267 15,329 54,641 15,657 17,094 16,093 16,911 65,755 18,521 20,658 19,984 22,439 81,602 22,761 23,829 24,057 26,128 96,774
growth % (y/y) 18.9% 25.3% 18.2% 20.6% 18.9% 20.6% 22.4% 29.0% 21.3% 10.3% 20.3% 18.3% 20.8% 24.2% 32.7% 24.1% 22.9% 15.4% 20.4% 16.4% 18.6%
Adj. EBITDA Margin % 41.1% 44.0% 40.8% 43.4% 45.5% 43.4% 47.4% 46.3% 46.0% 44.5% 46.0% 49.8% 48.0% 47.9% 48.6% 48.5% 52.1% 48.9% 50.5% 50.2% 50.4%
Total Other (expense) income, net 1,416 266 127 145 191 729 - 194 (132) 15 77 248 440 188 310 1,186 0 0 0 0 -
Pro forma pretax income 36,474 10,221 10,385 10,486 12,596 43,688 12,686 14,085 12,843 13,422 53,036 16,124 18,337 16,616 19,405 70,482 18,308 19,442 19,293 21,706 78,749
PTI Margin % 33.1% 35.1% 32.0% 34.3% 37.4% 34.7% 38.4% 38.2% 36.7% 35.3% 37.1% 43.4% 42.6% 39.8% 42.0% 41.9% 41.9% 39.9% 40.5% 41.7% 41.0%
Income Taxes (benefit) 6,207 1,397 1,808 1,677 1,976 6,858 2,008 2,436 2,091 2,220 8,755 2,231 2,874 1,779 2,947 9,831 2,929 3,305 3,280 3,690 13,204
Effective Tax Rate 17.0% 13.7% 17.4% 16.0% 15.7% 15.7% 15.8% 17.3% 16.3% 16.5% 16.5% 13.8% 15.7% 10.7% 15.2% 13.9% 16.0% 17.0% 17.0% 17.0% 16.8%
Pro forma Net Income 30,267 8,824 8,577 8,809 10,620 36,830 10,678 11,649 10,752 11,202 44,281 13,893 15,463 14,837 16,458 60,651 15,378 16,137 16,013 18,016 65,544
Net Margin % 27.4% 30.3% 26.4% 28.8% 31.5% 29.3% 32.3% 31.6% 30.7% 29.5% 31.0% 37.4% 35.9% 35.6% 35.7% 36.1% 35.2% 33.1% 33.6% 34.6% 34.1%
Pro Forma EPS Fully Diluted 3.88$ $1.14 $1.10 $1.14 $1.37 4.75$ $1.38 $1.51 $1.40 $1.46 5.77$ $1.82 $2.03 $1.95 $2.17 7.97$ $2.03 $2.14 $2.13 $2.40 8.69$
growth % (y/y) 18% 34.8% 14.9% 19.4% 21.8% 22% 21.9% 37.2% 23.2% 6.6% 21.3% 31.4% 34.0% 39.4% 48.3% 38% 11.7% 5.3% 8.8% 10.4% 9%
growth % (q/q) N/A 0.7% (2.8)% 3.0% 20.8% N/A 0.8% 9.4% (7.5)% 4.5% N/A 24.2% 11.6% (3.8)% 11.2% N/A (6.4)% 5.2% (0.6)% 12.7% N/A
Pro Forma EPS Fully Diluted (Excl. ESO) 4.30$ $1.26 $1.23 $1.26 $1.50 5.26$ $1.52 $1.66 $1.55 $1.61 6.34$ $1.98 $2.20 $2.13 $2.35 8.67$ $2.20 $2.33 $2.31 $2.60 9.43$
growth % (y/y) 18% 33.1% 15.5% 19.4% 21.8% 22% 20.9% 34.9% 22.3% 7.2% 20.6% 30.3% 32.9% 37.8% 45.6% 37% 11.0% 5.5% 8.3% 10.7% 9%
growth % (q/q) N/A 2.0% (2.3)% 2.8% 18.9% N/A 1.3% 8.9% (6.7)% 4.2% N/A 23.1% 11.1% (3.2)% 10.1% N/A (6.1)% 5.6% (0.7)% 12.5% N/A
Shares Outstanding (basic) 7,699 7,673 7,692 7,672 7,655 7,673 7,634 7,621 7,602 7,580 7,608 7,566 7,555 7,539 7,527 7,546 7,515 7,503 7,491 7,479 7,496
Shares Outstanding (fully diluted) 7,792 7,766 7,768 7,744 7,730 7,752 7,710 7,691 7,675 7,650 7,681 7,637 7,616 7,597 7,581 7,606 7,565 7,549 7,534 7,518 7,541
FY2022EFY2019A FY2020A FY2021A
27 J
uly 2
021
Micro
soft
8
Figure 5: MSFT Balance Sheet
Source: Company data, Credit Suisse estimates
FY2018 Sep '18 Dec '18 Mar '19 Jun '19 FY2019 Sep '19 Dec '19 Mar '20 Jun '20 FY2020 Sep '20 Dec '20 Mar '21 Jun '21 FY2021 Sep '21 Dec '21 Mar '22 Jun '22 FY2022
Full Year F1Q19A F2Q19A F3Q19A F4Q19A Full Year F1Q20 F2Q20A F3Q20A F4Q20A Full Year F1Q21 F2Q21 F3Q21 F4Q21 Full Year F1Q22 F2Q22 F3Q22 F4Q22 Full Year
Cash and cash equivalents 11,946 15,137 6,638 11,212 11,356 11,356 13,117 8,864 11,710 13,576 13,576 17,205 14,432 13,702 14,224 14,224 23,377 22,024 27,690 34,448 34,448
Short-term investments 121,822 120,743 121,024 120,406 122,463 122,463 123,519 125,389 125,916 122,951 122,951 120,772 117,536 111,705 116,110 116,110 116,110 116,110 116,110 116,110 116,110
Accounts receivable, net 26,481 17,390 19,680 19,269 29,524 29,524 19,087 23,525 22,699 32,011 32,011 22,851 27,312 26,322 38,043 38,043 27,166 33,580 34,410 39,298 39,298
Inventories 2,662 3,614 1,961 1,951 2,063 2,063 2,622 1,823 1,644 1,895 1,895 2,705 1,924 2,245 2,636 2,636 3,038 1,788 2,005 2,281 2,281
Deferred incomes taxes - - - - - - - - - - - - - - - - - - - - -
Other current assets 6,751 7,311 7,571 7,049 10,146 10,146 7,551 7,473 8,536 11,482 11,482 13,544 12,769 11,640 13,393 13,393 10,915 9,749 9,529 10,402 10,402
Total current assets 169,662 164,195 156,874 159,887 175,552 175,552 165,896 167,074 170,505 181,915 181,915 177,077 173,973 165,614 184,406 184,406 180,606 183,251 189,744 202,540 202,540
- - - - -
Property and equipment, net 29,460 31,430 32,717 33,648 36,477 36,477 38,409 40,522 41,221 44,151 44,151 47,927 51,737 54,945 59,715 59,715 62,066 63,891 65,285 66,854 66,854
Operating lease right-of-use assets 6,686 6,734 6,806 7,121 7,379 7,379 7,890 8,439 8,448 8,753 8,753 9,047 10,298 10,673 11,088 11,088 11,088 11,088 11,088 11,088 11,088
Equity and other investments 1,862 2,034 2,274 2,403 2,649 2,649 2,684 2,755 2,660 2,965 2,965 3,103 3,794 5,395 5,984 5,984 5,984 5,984 5,984 5,984 5,984
Goodwill 35,683 35,855 41,577 41,861 42,026 42,026 42,113 42,248 42,064 43,351 43,351 43,890 44,219 49,698 49,711 49,711 49,711 49,711 49,711 49,711 49,711
Intangible assets, net 8,053 7,579 8,482 8,103 7,750 7,750 7,508 7,126 6,855 7,038 7,038 6,923 6,555 8,127 7,800 7,800 7,800 7,800 7,800 7,800 7,800
Deferred incomes taxes - - - - - - - - - - - - - - - - - - - - -
Other long-term assets 7,442 9,792 10,129 10,258 14,723 14,723 14,455 14,630 13,696 13,138 13,138 13,034 13,561 14,427 15,075 15,075 15,075 15,075 15,075 15,075 15,075
Total assets 258,848 257,619 258,859 263,281 286,556 286,556 278,955 282,794 285,449 301,311 301,311 301,001 304,137 308,879 333,779 333,779 332,330 336,800 344,687 359,052 359,052
Liabilities
Accounts payable 8,617 8,511 7,563 7,544 9,382 9,382 8,574 8,811 9,246 12,530 12,530 12,509 12,770 13,412 15,163 15,163 13,062 13,410 13,868 14,736 14,736
Short-term debt 3,998 6,497 3,516 6,515 5,516 5,516 3,017 6,247 3,748 3,749 3,749 6,497 5,387 8,051 8,072 8,072 8,072 8,072 8,072 8,072 8,072
Accrued compensation 6,103 4,271 4,624 5,764 6,830 6,830 4,676 5,421 6,254 7,874 7,874 5,714 6,838 8,032 10,057 10,057 8,732 10,724 10,482 10,402 10,402
Income taxes 2,121 2,341 2,033 1,950 5,665 5,665 3,440 2,687 3,296 2,130 2,130 2,384 1,562 2,165 2,174 2,174 2,174 2,174 2,174 2,174 2,174
Short-term unearned revenue 28,905 26,704 24,285 24,251 32,676 32,676 29,904 27,343 27,012 36,000 36,000 33,476 30,402 30,083 41,525 41,525 39,864 37,472 37,847 40,118 40,118
Other 8,744 7,953 8,297 7,837 9,351 9,351 8,507 9,131 9,151 10,027 10,027 9,476 10,527 10,450 11,666 11,666 11,666 11,666 11,666 11,666 11,666
Total current liabilities 58,488 56,277 50,318 53,861 69,420 69,420 58,118 59,640 58,707 72,310 72,310 70,056 67,486 72,193 88,657 88,657 83,570 83,518 84,109 87,168 87,168
- - - -
Long-term debt 72,242 69,733 69,653 66,585 66,662 66,662 66,478 63,361 62,862 59,578 59,578 57,055 55,136 50,007 50,074 50,074 50,074 50,074 50,074 50,074 50,074
Long-term unearned revenue 3,815 3,538 3,799 3,884 4,530 4,530 4,122 3,878 3,385 3,180 3,180 28,204 26,701 27,157 2,616 2,616 2,694 2,479 2,553 2,821 2,821
Long-term income taxes - 28,936 29,161 29,514 29,612 29,612 28,457 28,754 28,888 29,432 29,432 2,829 2,985 2,631 27,190 27,190 27,190 27,190 27,190 27,190 27,190
Deferred income taxes 541 1,977 2,062 1,838 233 233 234 222 185 204 204 187 174 173 198 198 198 198 198 198 198
Operating lease liabilities 5,568 5,652 5,683 5,972 6,188 6,188 6,659 7,172 7,248 7,671 7,671 7,753 8,875 9,272 9,629 9,629 9,629 9,629 9,629 9,629 9,629
Other long-term liabilities 35,476 5,539 6,055 6,763 7,581 7,581 8,826 9,658 9,673 10,632 10,632 11,525 12,544 12,941 13,427 13,427 13,427 13,427 13,427 13,427 13,427
Total liabilities 176,130 171,652 166,731 168,417 184,226 184,226 172,894 172,685 170,948 183,007 183,007 177,609 173,901 174,374 191,791 191,791 186,782 186,515 187,180 190,508 190,508
Preferred Stock or Minority Interest - - - - - - - - - - - - - - - - - - - - -
Stockholders' equity
Total stockholders' equity 82,718 85,967 92,128 94,864 102,330 102,330 106,061 110,109 114,501 118,304 118,304 123,392 130,236 134,505 141,988 141,988 145,548 150,285 157,507 168,545 168,545
- - - -
Total liabilities and stockholders' equity 258,848 257,619 258,859 263,281 286,556 286,556 278,955 282,794 285,449 301,311 301,311 301,001 304,137 308,879 333,779 333,779 332,330 336,800 344,687 359,052 359,052
FY2022EFY2019A FY2020A FY2021A
27 J
uly 2
021
Micro
soft
9
Figure 6: MSFT Statement of Cash Flows
Source: Company data, Credit Suisse estimates
FY2018 Sep '18 Dec '18 Mar '19 Jun '19 FY2019 Sep '19 Dec '19 Mar '20 Jun '20 FY2020 Sep '20 Dec '20 Mar '21 Jun '21 FY2021 Sep '21 Dec '21 Mar '22 Jun '22 FY2022
Full Year F1Q19A F2Q19A F3Q19A F4Q19A Full Year F1Q20 F2Q20 F3Q20A F4Q20 Full Year F1Q21 F2Q21 F3Q21 F4Q21 Full Year F1Q22 F2Q22 F3Q22 F4Q22 Full Year
Operating Activities
Net Income (GAAP) 16,571 8,824 8,420 8,809 13,187 39,240 10,678 11,649 10,752 11,202 44,281 13,893 15,463 15,457 16,458 61,271 15,378 16,137 16,013 18,016 65,544
Depreciation, amortization, and other 10,261 2,837 2,995 2,926 2,924 11,682 2,971 3,203 3,118 3,504 12,796 2,645 2,761 2,936 3,344 11,686 4,453 4,387 4,764 4,421 18,026
Stock-based compensation 3,940 1,107 1,183 1,172 1,190 4,652 1,262 1,340 1,338 1,349 5,289 1,456 1,566 1,525 1,571 6,118 1,528 1,706 1,668 1,820 6,722
Net recognized losses (gains) on investments (2,212) (240) (135) (95) (322) (792) 11 (203) 52 (79) (219) (128) (354) (351) (416) (1,249) - - - - -
Excess tax benefits from stock-based compensation - - - - - - - - - - - - - - - - - -
Deferred income taxes (5,143) (247) (173) (320) (5,723) (6,463) (177) (53) (206) 447 11 (11) (17) (88) (34) (150) - - - - -
Deferral of unearned revenue - - - - - - - - - - - - - - - - - - - - -
Recognition of unearned revenue - - - - - - - - - - - - - - -
Other - - - - - - - - - - - - - - - - - - - - -
Changes in work ing capital 20,467 1,376 (3,390) 1,028 4,852 3,866 (927) (5,256) 2,450 2,250 (1,483) 1,480 (6,903) 2,700 1,787 (936) 5,084 (6,657) 213 (439) (1,800)
Accounts receivable (3,862) 9,194 (2,396) 460 (10,070) (2,812) 10,090 (4,203) 891 (9,355) (2,577) 8,843 (4,008) 290 (11,606) (6,481) 10,877 (6,414) (830) (4,888) (1,255)
Inventories (465) (956) 1,654 12 (113) 597 (561) 799 181 (251) 168 (808) 788 (329) (388) (737) (402) 1,250 (217) (276) 355
Other current assets (952) (677) (173) (14) (854) (1,718) (438) 165 94 (2,151) (2,330) (54) 730 478 (2,086) (932) 2,478 1,166 220 (874) 2,991
Other long-term assets (285) 21 (473) (517) (865) (1,834) (333) (517) 124 (311) (1,037) (62) (1,499) (885) (1,013) (3,459) - - - - -
Accounts payable 1,148 (395) (440) (197) 1,264 232 (547) (7) 546 3,026 3,018 315 33 833 1,617 2,798 (2,101) 348 458 868 (427)
Unearned revenue 5,922 (2,441) (2,122) 20 9,005 4,462 (2,892) (2,936) (736) 8,776 2,212 (3,064) (3,227) (473) 11,397 4,633 (1,661) (2,392) 375 2,271 (1,407)
Income taxes 18,183 (1,091) (64) 276 3,808 2,929 (3,336) (471) 765 (589) (3,631) (983) (2,368) 1,074 (32) (2,309) (1,200) (1,200)
Other current liabilities 798 (2,322) 656 649 2,436 1,419 (3,320) 1,489 695 2,482 1,346 (2,951) 1,755 1,590 3,755 4,149 (2,986) (400) 133 2,191 (1,062)
Long-term unearned revenue (20) 43 (32) 339 241 591 410 425 (110) 623 1,348 244 893 122 143 1,402 78 (216) 74 268 205
Cash Flow from Operations 43,884 13,657 8,900 13,520 16,108 52,185 13,818 10,680 17,504 18,673 60,675 19,335 12,516 22,179 22,710 76,740 26,443 15,573 22,658 23,818 88,492
% growth (y/y) 11.1% 9.8% 13.0% 11.3% 41.1% 18.9% 1.2% 20.0% 29.5% 15.9% 16.3% 39.9% 17.2% 26.7% 21.6% 26.5% 36.8% 24.4% 2.2% 4.9% 15.3%
% growth (q/q) N/A 19.6% (34.8)% 51.9% 19.1% N/A (14.2)% (22.7)% 63.9% 6.7% N/A 3.5% (35.3)% 77.2% 2.4% N/A 16.4% (41.1)% 45.5% 5.1% N/A
Investing Activities
Capital Expenditures (11,632) (3,602) (3,707) (2,565) (4,051) (13,925) (3,385) (3,545) (3,767) (4,744) (15,441) (4,907) (4,174) (5,089) (6,452) (20,622) (6,804) (6,212) (6,159) (5,990) (25,165)
Capital Leases (1,968) (698) (193) (835) (1,249) (2,975) (1,415) (955) (133) (1,055) (3,558) (481) (1,226) (911) (848) (3,466) (600) (600) (600) (600) (2,400)
CapEx+Cap Leases (13,600) (4,300) (3,900) (3,400) (5,300) (16,900) (4,800) (4,500) (3,900) (5,799) (18,999) (5,388) (5,400) (6,000) (7,300) (24,088) (7,404) (6,812) (6,759) (6,590) (27,565)
Capex + Capital Leases % growth yr/yr 33.3% 59.3% 18.2% (2.9)% 29.3% 24.3% 11.6% 15.4% 14.7% 9.4% 12.4% 12.3% 20.0% 53.8% 25.9% 26.8% 37.4% 26.1% 12.7% (9.7)% 14.4%
Depreciation and Amortization % of Revenue 9.3% 9.8% 9.2% 9.6% 9.7% 9.3% 9.0% 8.7% 8.9% 9.2% 8.9% 7.1% 6.4% 7.0% 7.2% 7.0% 10.2% 9.0% 10.0% 8.5% 9.4%
Depreciation % of Revenue 9.3% 9.8% 9.2% 9.6% 9.7% 9.3% 9.0% 8.7% 8.9% 9.2% 8.9% 7.1% 6.4% 7.0% 7.2% 7.0% 10.2% 9.0% 10.0% 8.5% 9.4%
Capex % Commercial Cloud Revenue 44.0% 42.6% 41.6% 26.6% 33.0% 36.7% 29.3% 28.6% 28.5% 33.6% 30.1% 32.4% 25.4% 31.0% 33.0% 29.9% 33.5% 29.0% 27.0% 24.0% 28.1%
Capex % PPE 39.5% 11.5% 11.3% 7.6% 11.1% 38.2% 8.8% 8.7% 9.1% 10.7% 35.0% 10.2% 8.1% 9.3% 10.8% 34.5% 11.0% 9.7% 9.4% 9.0% 37.6%
Free Cash Flow 30,284 9,357 5,000 10,120 10,808 35,285 9,018 6,180 13,604 12,874 41,676 13,947 7,116 16,179 15,410 52,652 19,039 8,761 15,899 17,228 60,927
% growth (y/y) 3.3% (3.9)% 9.3% 17.0% 47.7% 16.5% (3.6)% 23.6% 34.4% 19.1% 18.1% 54.7% 15.1% 18.9% 19.7% 26.3% 36.5% 23.1% (1.7)% 11.8% 15.7%
Net Interest Expense 519 (7) (32) 3 555 519 (87) (34) (59) - (180) - 26 - - 26 - - - - -
Tax Rate 17% 14% 17% 16% 17% 16% 16% 17% 16% 17% 17% 14% 16% 11% 15% 14% 16% 17% 17% 17% 17%
Unlevered Free Cash Flow 30,715 9,351 4,974 10,123 11,269 35,716 8,945 6,152 13,555 12,874 41,525 13,947 7,138 16,179 15,410 52,674 19,039 8,761 15,899 17,228 60,927
% growth (y/y) 2.3% (5.6)% 5.5% 15.7% 53.4% 16.3% (4.3)% 23.7% 33.9% 14.2% 16.3% 55.9% 16.0% 19.4% 19.7% 26.8% 36.5% 22.7% (1.7)% 11.8% 15.7%
Acquisitions, net of cash (888) (245) (1,593) (269) (281) (2,388) (462) (80) (329) (1,650) (2,521) (481) (415) (7,512) (501) (8,909) - - - - -
Purchases of investments (137,380) (19,551) (16,858) (5,846) (15,442) (57,697) (23,390) (19,011) (15,910) (18,879) (77,190) (14,580) (15,092) (18,375) (14,877) (62,924) - - - - -
Maturities of investments 26,360 5,214 3,782 5,893 5,154 20,043 19,082 11,230 17,247 18,890 66,449 14,266 15,264 15,016 7,246 51,792 - - - - -
Sales of investments 117,577 15,231 14,176 1,424 7,363 38,194 6,379 5,370 2,810 3,162 17,721 2,414 2,421 5,876 3,297 14,008 - - - - -
Other (98) - - - - - - - - (1,241) (1,241) (2,083) 327 400 434 (922) - - - - -
Cash Flow from Investing (6,061) (2,953) (4,200) (1,363) (7,257) (15,773) (1,776) (6,036) 51 (4,462) (12,223) (5,371) (1,669) (9,684) (10,853) (27,577) (6,804) (6,212) (6,159) (5,990) (25,165)
Financing Activities
Proceeds (repayments) of short-term debt, net (7,324) - - - - - - - - - - - - - - - - - - - -
Proceeds from debt, maturities longer than 90 days 7,183 - - - - - - - - - - - - - - - - - -
Repayments of debt, maturities longer than 90 days (10,060) - (3,000) - (1,000) (4,000) (2,500) (18) (3,000) (3,417) (8,935) - (3,250) (500) - (3,750) - - - - -
Common stock issued 1,002 360 200 274 308 1,142 427 234 342 340 1,343 545 302 396 450 1,693 - - - - -
Common stock repurchased (10,721) (3,744) (6,413) (4,753) (4,633) (19,543) (4,912) (5,206) (7,059) (5,791) (22,968) (6,743) (6,535) (6,930) (7,177) (27,385) (6,325) (6,562) (6,689) (6,935) (26,511)
Common stock cash dividends paid (12,699) (3,220) (3,544) (3,526) (3,521) (13,811) (3,510) (3,886) (3,876) (3,865) (15,137) (3,856) (4,230) (4,221) (4,214) (16,521) (4,161) (4,152) (4,144) (4,135) (16,591)
Excess tax benefits from stock-based compensation - - - - - - - - - - - - - - - - - - - - -
Other (971) (780) (459) 404 160 (675) 286 (39) (1,052) 471 (334) (235) 79 (1,937) (430) (2,523) - - - - -
Cash Flow from Financing (33,590) (7,384) (13,216) (7,601) (8,686) (36,887) (10,209) (8,915) (14,645) (12,262) (46,031) (10,289) (13,634) (13,192) (11,371) (48,486) (10,485) (10,714) (10,833) (11,070) (43,102)
Foreign currency exchange rate impact on cash 34 (129) 17 18 (21) (115) (72) 18 (64) (83) (201) (46) 14 (33) 36 (29) - - - - -
Net Increase in Cash and Cash Equivalents 4,267 3,191 (8,499) 4,574 144 (590) 1,761 (4,253) 2,846 1,866 2,220 3,629 (2,773) (730) 522 648 9,153 (1,353) 5,666 6,758 20,224
Cash and Cash Equivalents, beginning of period 4,647 11,946 15,137 6,638 11,212 11,946 11,356 13,117 8,864 11,710 11,356 13,576 17,205 14,432 13,702 13,576 14,224 23,377 22,024 27,690 14,224
Cash and Cash Equivalents, end of period 8,914 15,137 6,638 11,212 11,356 11,356 13,117 8,864 11,710 13,576 13,576 17,205 14,432 13,702 14,224 14,224 23,377 22,024 27,690 34,448 34,448
FY2022EFY2019A FY2020A FY2021A
27 July 2021
Microsoft 10
27 July 2021
Microsoft 11
Valuation Methodology and Risks
Target Price and Rating Valuation Methodology and Risks: (12 months) for Microsoft (MSFT.OQ)
Method: Our $320 target price and Outperform rating for MSFT are based on our discounted cash flow (DCF) using a weighted average cost of capital (WACC) of 8%, a 12% CAGR for uFCF growth rate through FY31, and a 3.5% terminal growth rate. We believe that this target price is warranted given our expectations for sustained growth in Commercial Cloud while generating incremental leverage. We rate MSFT Outperform as we expect its total return to exceed its peers.
Risk: Risks to our $320 target price and Outperform rating for MSFT are macroeconomic uncertainty and growing competitive threats in the hybrid cloud space.
27 July 2021
Microsoft 12
Companies Mentioned (Price as of 27-Jul-2021) Alphabet (GOOGL.OQ, $2638.0) Amazon com Inc. (AMZN.OQ, $3626.39) Microsoft (MSFT.OQ, $286.54, OUTPERFORM, TP $320.0)
Disclosure Appendix
Analyst Certification
The analysts identified in this report each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for Microsoft (MSFT.OQ)
MSFT.OQ Closing Price Target Price
Date (US$) (US$) Rating
22-Oct-18 109.63 125.00 O
25-Apr-19 129.15 145.00
19-Jul-19 136.62 155.00
13-Jan-20 163.28 180.00
29-Jan-20 168.04 190.00
29-Apr-20 177.43 195.00
16-Jul-20 203.92 225.00
28-Oct-20 202.68 235.00
27-Jan-21 232.90 265.00
15-Mar-21 234.81 *
01-Apr-21 242.35 265.00 O *
28-Apr-21 254.56 300.00
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM
As of December 10, 2012 Analysts’ stock rating are defined as follows:
Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most att ractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as Europea n (excluding Turkey) ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin America, Turkey and Asia (excluding Japan and Australia), stock ratings are based on a stock’s total return relative to the average total retu rn of the relevant country or regional benchmark (India - S&P BSE Sensex Index); prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analys t’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cov er multiple sectors.
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Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 55% (31% banking clients)
Neutral/Hold* 33% (23% banking clients)
Underperform/Sell* 10% (21% banking clients)
Restricted 2%
Please click here to view the MAR quarterly recommendations and investment services report for fundamental research recommendations. *For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.
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See the Companies Mentioned section for full company names
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Investors should note that income from such securities and other financial instruments, if any, may fluctuate and that price or value of such securities and instruments may rise or fall and, in some cases, investors may lose their entire principal investment. To the extent any Credit Suisse equity research analyst employed by Credit Suisse International (a "UK Analyst") has interactions with a Spanish domiciled client of Credit Suisse AG or its affiliates, such UK Analyst will be acting for and on behalf of CSSSV, with respect only to the provision of equity research services to Spanish domiciled clients of Credit Suisse AG or its affiliates. Pursuant to CVM Resolution No. 20/2021, of February 25, 2021, the author(s) of the report hereby certify(ies) that the views expressed in this report solely and exclusively reflect the personal opinions of the author(s) and have been prepared independently, including with respect to Credit Suisse. Part of the author(s)´s compensation is based on various factors, including the total revenues of Credit Suisse, but no part of the compensation has been, is, or will be related to the specific recommendations or views expressed in this report. In addition, Credit Suisse declares that: Credit Suisse has provided, and/or may in the future provide investment banking, brokerage, asset management, commercial banking and other financial services to the subject company/companies or its affiliates, for which they have received or may receive customary fees and commissions, and which constituted or may constitute relevant financial or commercial interests in relation to the subject company/companies or the subject securities. This research report is authored by: Credit Suisse Securities (USA) LLC ........................................................................................ Stephen Ju ; Radi Sultan, CFA Credit Suisse Securities (Canada), Inc. ............................................................................................................ Marco Iaboni To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the FINRA 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse Securities (Canada), Inc. ............................................................................................................ Marco Iaboni
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