“It’s a real tragedy when you buy a stock that’s overpriced; the company is a big success and you still don’t make any money.” Peter Lynch, “One Up on Wall Street,” New York, Penguin Books, 1989, p. 244.
Microsoft shares recently have been trading at about $70, off more than 40 percent from a high of $119.93. They went as low as $40 a share in December 2000. Is Microsoft a buy at $70? Is it a compelling buy if it dips down to $40 again? What is Microsoft worth and what type of annualized return would one derive from buying the stock today?

Before we try to answer those questions for Microsoft, let’s consider another one:
Let’s say a neighborhood gas station is put up for sale for $500,000. Further, let’s assume that the gas station can be sold for $250,000 after 10 years and free cash is expected to be $100,000 a year for the next ten years. Let’s say that we have an alternative risk-free investment that would give us a 10 percent annualized return on the money. Are we better off buying the gas station or taking our 10 percent risk-free return?

“Any business is worth the sum of free cash flow it will generate from now to eternity, discounted to present value using a reasonable risk-free interest rate” (John Burr Williams, Ben Graham, Warren Buffett, et al.)

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