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Some analysis of Microsoft Corp (MSFT)

Analysing companies' finances and value from their financial statements using ratios and formulae
TheMotorcycleBoy
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Some analysis of Microsoft Corp (MSFT)

#229830

Postby TheMotorcycleBoy » June 16th, 2019, 8:14 am

Hi folks,

After doing loads of nattering about software firms and getting my arm wristed over my reservations with direct US-stocks investing, I decided to spend some time looking the accounts of software giant Microsoft.

I got several different points and posts to make but firstly I'll present some fundamental analysis that I did for the years reported 2014-2018 and a forecast I've prepared for 2019.

The reported years can be found here MSFT annual reports but since they are about 3/4 of the way into their next report period and given that Msft seem to undergoing a time of growth/transformation I decided to peruse recent FORM-Q filings. The form-q stuff was pretty good, the balance sheet/equity stuff is obviously almost spot on, and the P&L and CF statements have the first three quarters, and by researching+testing simple multiplication by x 1.333 on earlier years, it seemed a pretty reasonable idea to just apply this multiplication the results from Jun 2018 to Mar 2019 to generate suitable forecasts for 2019.



Notes: The ROIC figure is a lot bigger than ROCE since in my formula for ROIC cash and marketable investments are added back to the denominator. Just different ways of expressing similar things. Google for other definitions if you like. (For a similar reason CROCI using Phil Oakley's is smaller since it uses average CE whereas mine uses YTD IC).

For my dividend information I used this:
https://www.streetinsider.com/dividend_ ... php?q=msft

MSFT very nicely present us with a historic SP lookup:
https://www.microsoft.com/en-us/Investo ... ookup.aspx

Matt

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Re: Some analysis of Microsoft Corp (MSFT)

#229833

Postby TheMotorcycleBoy » June 16th, 2019, 8:34 am

I'd like to mention that there's some pretty odd stuff at play in the MSFT reports. I noticed this in the P&L statements which gave cause for some headscratching. What they do is they for a given reported year e.g. 2016, they report income before income taxes and then an entry for provision for taxes, and then the, presumably, "net income", e.g.


from https://www.microsoft.com/investor/repo ... index.html

However in the report for the following years, e.g. 2017, 2018, they report that earlier reports income differently. I *am* guessing it has to do with tax (and maybe revenue??) in the actual report being estimated, and thus it's not until the next year that the actual figure is known. Very confusing for a newbie at all this caper. For example when you look at the P&L for 2018:


from https://www.microsoft.com/en-us/annualr ... nualreport

FWIW for my spreadsheets, I always just took the figures taken from the actual year of report's AR. However if anyone knows why MSFT reports in this way, and the best course of action for FA, then be my guest to explain.

Matt

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Re: Some analysis of Microsoft Corp (MSFT)

#229837

Postby TheMotorcycleBoy » June 16th, 2019, 8:53 am

I also did some SP valuations used DCF and EPV methods. In the DCF methods I used the following assumptions for growth of FCFPS:
1. at 2% forever
2. at 6% for first 5 years, then 4% for next 5 years, then 2% forever
3. at 7% for first 5 years, then 6% for next 5 years, then 2.5% forever

And for the EPV methods, I assumed taxation rate of either 16% or 20%, add back 100% of depreciation, and since EPV assumes zero growth for model to work, I added back 20% of the R&D and SDA operating expenses.

I used a discount rate of 8.5% - a guess based on 1.5% risk free rate + 7% (my own simplifying equity risk premium idea since at 7% you doubles yer money in 10 years)

Valuations based on AR of 2018

Based on forecasted 2019 figures


Note that simply wall street (give it an email address and you get 10 free valuations) reckons about $86 per share based on DCFs, so I'm reasonably content with my valuation. But only the market knows. It's current SP of $132.45 does seem a little higher the most extragavant estimates for FCF growth only yield $104.98.

Since I don't really know anything about the price these type of stocks do trade at, I'll finally add that setting a hypothetical SP of $112 does give us an PE ratio of about 25. Does this sound better?

Matt

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Re: Some analysis of Microsoft Corp (MSFT)

#229920

Postby JamesMuenchen » June 16th, 2019, 2:13 pm

https://www.microsoft.com/en-us/Investo ... dards.aspx
On July 1, 2017, we adopted two new accounting standards that cover revenue recognition and lease accounting.

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Re: Some analysis of Microsoft Corp (MSFT)

#229959

Postby TheMotorcycleBoy » June 16th, 2019, 4:34 pm

JamesMuenchen wrote:https://www.microsoft.com/en-us/Investor/events/FY-2017/new-reporting-standards.aspx
On July 1, 2017, we adopted two new accounting standards that cover revenue recognition and lease accounting.

It could be something to do with that. I glanced I a few ARs from 2016 and earlier and they don't seem to do that weird thing with earlier periods tax entries. But I've not figured out why those new methods effect it so.

Matt

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Re: Some analysis of Microsoft Corp (MSFT)

#229963

Postby TheMotorcycleBoy » June 16th, 2019, 4:40 pm

Hmm....

To try to figure out if MSFT is overpriced at 29 PE I noted

RedHat PE 77
Adobe PE 50
Amazon PE 78

Some stuff about Adobe:

https://simplywall.st/stocks/us/softwar ... portunity/
https://simplywall.st/stocks/us/softwar ... asdaqadbe/

Matt

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Re: Some analysis of Microsoft Corp (MSFT)

#231325

Postby Charlottesquare » June 21st, 2019, 11:10 pm

"Impacts to Previously Reported Results

Adoption of the standards related to revenue recognition and leases impacted our previously reported results as follows:"

Above is in the notes to their accounts, there is no page numbering or note numbering that I can see so I cannot direct you where to look but if you dig into the notes (after the actual accounts- a bit after accounting policies etc) there is an explanation re changes to previously reported results then tables below the bit I have quoted showing the adjustments made re 2016 and 2017 figures(in the 2018 accounts)

The catch with really studying individual accounts is you often need to get right into the notes to find answers which can mean at least skim reading well over a hundred or so pages.

I tend to ignore most of the reports etc at the front end, at least initially, and go straight to the financial statements and all the notes, but that is because of what I do for a living (accountant) so I tend to be reasonably comfortable with UK based entities. Once you look at enough you well start getting a feel for where certain bits are likely to be, but I must admit I probably would not be that comfortable with US accounts as certainly with say tax I would not have a clue what they are going on about as I have no knowledge of US tax.

Edit- I found it when my mouse cursor was circa halfway down the page

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Re: Some analysis of Microsoft Corp (MSFT)

#231374

Postby TheMotorcycleBoy » June 22nd, 2019, 10:41 am

Charlottesquare wrote:"Impacts to Previously Reported Results

Adoption of the standards related to revenue recognition and leases impacted our previously reported results as follows:"

Above is in the notes to their accounts, there is no page numbering or note numbering that I can see so I cannot direct you where to look but if you dig into the notes (after the actual accounts- a bit after accounting policies etc) there is an explanation re changes to previously reported results then tables below the bit I have quoted showing the adjustments made re 2016 and 2017 figures(in the 2018 accounts)

The catch with really studying individual accounts is you often need to get right into the notes to find answers which can mean at least skim reading well over a hundred or so pages.

I tend to ignore most of the reports etc at the front end, at least initially, and go straight to the financial statements and all the notes, but that is because of what I do for a living (accountant) so I tend to be reasonably comfortable with UK based entities. Once you look at enough you well start getting a feel for where certain bits are likely to be, but I must admit I probably would not be that comfortable with US accounts as certainly with say tax I would not have a clue what they are going on about as I have no knowledge of US tax.

Edit- I found it when my mouse cursor was circa halfway down the page

Thanks for digging a bit Charlottesquare.

It's on page 56, of the 2018's AR.

Will process this in a bit.

Matt

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Re: Some analysis of Microsoft Corp (MSFT)

#231384

Postby TheMotorcycleBoy » June 22nd, 2019, 11:43 am

Wow. I think that I understand now. It looks like a new US standard permits firms to recognise revenues from licensed products with SAs ("service agreements"). The AR18 document mostly cites Windows 10, on page 55:

The most significant impact of the standard relates to our accounting for software license revenue. Specifically, for Windows
10, we recognize revenue predominantly at the time of billing and delivery rather than ratably over the life of the related
device. For certain multi-year commercial software subscriptions that include both distinct software licenses and SA, we
recognize license revenue at the time of contract execution rather than over the subscription period. Due to the complexity
of certain of our commercial license subscription contracts, the actual revenue recognition treatment required under the
standard depends on contract-specific terms and in some instances may vary from recognition at the time of billing. Revenue
recognition related to our hardware, cloud offerings (such as Office 365), LinkedIn, and professional services remains
substantially unchanged.


The model (even though I've only personally purchase an MS windows when it's been preinstalled on my eldest's laptop) is that you pay a single fee (for the licence) and this entitles you receives free service releases (patches, fixes etc). (Or in the case of some, free major version upgrades.).

Presumably when Win10 first came out, M$ would recognise some of the revenue at the sale of the license, and since although the patches are free, they part of the SA (service agreement), and will have a cost for M$ in future reportings, so I'm just guessing that M$ in the past recognised those revenues in the future periods.

However the new standard means M$ can recognise all the revenues at contract agreement for certain products (e.g. Win10). So the process of reinstating means more revenue is recognised upfront (less deferred tax), and it also changes the provision made for income tax (which US/MSFT seem to use as the terminology for our Corp Tax).

Matt

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Re: Some analysis of Microsoft Corp (MSFT)

#239450

Postby JamesMuenchen » July 26th, 2019, 11:11 am

Microsoft announced quarterly earnings last week, up 14% YoY.
https://seekingalpha.com/article/427584 ... all-slides

Beat expectations (as expected these days) and are up a bit since to a new ATH.
Seems they are currently the worlds most valuable company at over $1.07 trillion market cap.

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Re: Some analysis of Microsoft Corp (MSFT)

#256010

Postby TheMotorcycleBoy » October 5th, 2019, 12:56 pm

JamesMuenchen wrote:Microsoft announced quarterly earnings last week, up 14% YoY.
https://seekingalpha.com/article/427584 ... all-slides

Beat expectations (as expected these days) and are up a bit since to a new ATH.
Seems they are currently the worlds most valuable company at over $1.07 trillion market cap.

After finally opening a position in MSFT last month, I'm continuing to research the firm and remain very impressed. I spent a little while this morning trying to gather more info in particular about their revenue by segment and by product. This is some of my condensed from a scan of the 2019s 10k.



But that wasn't quite what I was after. This link however has a nicer breakdown. It's only 6 months, so prob still current, also has some info on other techs. It indicates Windows revenues as being only 17.7% of firm's total.

Other Microsoft developments/interests. One of my work mates mentioned that *apparently* their cloud offering's security/privacy features beat the competition. Something to do with their tech. somehow "isolating" knowledge of their client's encrypted data away from the provider (Microsoft) as being superior compared to other vendor's solutions. I'm yet to find accurate descriptions of if/why this is the case, as yet. Might badger my colleague some more.

Also as many geeks will be aware, MS is slowly "leveraging" the Linux OS into Windows 10. (I've only recently been upgraded to W10 at work, and predominantly use Linux, at work and home, so I'm yet to fully explore the potential of this). I believe that currently the Windows file system (i.e. one's C: drive) is mounted (i.e. visible and available for use) on the Linux-on-Windows offering, with a UNIX style shell and power tools. This is great news for software developers. But apparently it gets better. In the near future an windows 10 update, will provide the facility to load native linux driver into the subsystem, which presumably will provide access to native file systems (which is miles better than Windows NTFS), and other benefits.

Some details here I believe:
https://linuxhint.com/linux_kernel_windows10/
https://www.linuxinsider.com/story/86007.html

For developers like me this an excellent move. Myself and others are obliged (obviously) to provide software and support for Windows users, but find many features on UNIX environments far more suited to s/w development. Hence these recent steps by MS can only improve ongoing competitiveness of their desktop's offering.

I note also that MS have acquired github, the opensource code hosting online repository. Another Brownie point, in their final realisation, that following rather bucking the Opensource trend is best $$$ option for them.

Other MS news, which I reserve commenting on, since the article, mentions my employer. But I thought I'd the link for those e.g. James who are following this company:

https://www.cnet.com/news/microsofts-cu ... ace-pro-x/

MCB


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