I estimated FY36 FCF of big tech (MSFT in this case) and what it would take for Microsoft to deliver given my desired rate of return to be 12%. It is working backwards to see what market cap makes sense from FY36 FCF. Grill me on my assumptions as I'm an amateur trying my best to make sense of the data but man do I see 50-60% drawdowns for them to make value investors thirst over these companies.
* **Market Cap:** $2.9T
* **Current FCF (FY26 e):** $60B (Yield: \~2.1%)
* **Current Revenue:** $318B (FCF Margin: \~18.9%)
* **Current FCF Multiple:** 48.3x
To justify the current price and achieve a **12% target return** with an **exit FCF multiple of 25x**:
* **Implied Required FCF Growth:** **19.6% CAGR** for the next 10 years.
* **Required Terminal FCF:** **$360B** (a massive jump from the current $60B).
Discounting the cash flows at **12.0%**, here is how the potential growth paths stack up against today's valuation:
|**Case**|**10-Yr Growth Est.**|**Terminal FCF**|**Estimated Fair Value**|**Implied Upside**|
|:-|:-|:-|:-|:-|
|**Bull**|16.0%|$265B|$2.1T|\-26.5%|
|**Base**|12.0%|$186B|$1.5T|\-48.3%|
|**Bear**|8.0%|$130B|$1.0T|\-64.0%|
* **My Buy Threshold:** **$1.3T** (Applying a 15% Margin of Safety to the 12% Base Case fair value). This implies a **56% drawdown** from current levels to get a significant safety cushion.
Thoughts?