Microsoft Corporation

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1 Grade Earnings Last Earnings Release 10/27/2017 Last Qtr. Actual vs. Est. $0.84 / $0.71 Next Release 10/31/2017 $0.72 Year Ending 06/30/2017 $2.96 Quick Facts Dividend Yield 1.86% 52 Wk High $ Wk Low $62.14 Short Interest 0% of float $ /13/2017 Rated 'BUY' since Aug 24th, 2016, when it was upgraded from 'HOLD' Year Ending 06/30/2018 $3.25 Market Cap $658.4B Overview Company Scores Very Good Fundamental Grades MarketGrader currently has a BUY rating on Microsoft Corporation (MSFT), based on a final overall grade of scored by the company's fundamental analysis. scores at the 98th percentile among all 5816 North American equities currently followed by MarketGrader. Our present rating dates to August 24, 2016, when it was upgraded from a HOLD. With an overall grade of, is the highest graded company in the Packaged Software sub-industry, followed by Paycom Software, Inc. (PAYC), with an overall grade of The stock, up 20.4% in the last six months, has outperformed both the Packaged Software group, up 6.09% and the S&P 500 Index, which has returned 9.0% in the same period. Please go to pages two and three of this report for a complete breakdown of MSFT's fundamental analysis. Price, Rating and Sentiment History - 2 Years 1

2 Growth B+ The Company's Recent Reports Reflect Solid Top and Bottom Line Growth According to its latest earnings report, booked Market Growth LT D $24.43 billion in total revenue last quarter, a 19.87% rise from the year earlier period's $20.38 billion, which is not only a healthy increase but an Market Growth ST A improvement from its long term sales growth. Also including the latest EPS Growth A+ quarter the company had $93.44 billion in 12-month trailing revenue, only 2.23% higher than the $91.40 billion booked during the equivalent period Growth Potential B ended three years ago, a modest increase in such timeframe. The next couple of quarters will help investors determine if the recent increase in Earnings Momentum A- top line growth is sustainable and whether it will lead to higher profits. It also reported very strong year-over-year profit growth, but not so when Earnings Surprise A- measuring full year profits against results from three years ago, showing very weak growth from a long term perspective despite the latest short term jump. Its net income rose 40.21% to $6.58 billion in its most recent quarter from $4.69 billion (excluding extraordinary items) in the year earlier period, while full year profit for the 12 months ended on September 30, 2017 of $23.09 billion was 8.05% higher than full year net of $21.37 billion reported three years earlier. The company's ongoing margin expansion accelerated during its latest quarter with an average 22.51% increase in EBITDA, operating and net margins relative to the year ago period. Investors reacted very positively to the company's October 27, 2017 earnings report, which came 18.31% above the consensus estimate for the period; the stock jumped 6.51% on the news. With this earnings release Microsoft Corporation continued a trend of positive earnings surprises; it has beaten the Street's estimate by an average of 16.29% over the last six quarters, certainly a positive indicator for the stock. Revenue Qtrly. 09/30/2017 $24.4B Revenue Qtrly. Year Ago $20.4B Revenue 1 Yr. Chg % Revenue 12 Mo. Tr. Latest $93.4B Revenue 12 Mo. Tr. 3Y Ago $91.4B Revenue 12 Mo. Tr. 3Y Chg. 2.23% Net Income Qtrly. 09/30/2017 $6.6B Net Income Qtrly. Year Ago $4.7B Net Income 1 Yr. Chg % Net Income 12 Mo. Tr. Latest $23.1B Net Income 12 Mo. Tr. 3Y Ago $21.4B Net Income 12 Mo. Tr. 3Y Chg. 8.05% Value B- Company's Shares Seem Fully Priced and Buying at this Level Would Be Highly Speculative Shares of, trading at times trailing 12-month Capital Structure C earnings per share, are very expensive when compared to our "optimum" P/E ratio of 15.83, a 56.97% premium. The MarketGrader-calculated P/E Analysis D optimum P/E is derived from the company's five year EPS growth rate, Price/Book Ratio D looking at quarterly earnings in rolling 12-month periods. By this measure, 's earnings per share have grown at a 9.71% Price/Cash Flow Ratio A- annualized rate during the last five years. If the recent growth in the company's margins is sustained in the form of strong Profitability Price/Sales Ratio B indicators--as it has now--it means the company could be gaining market share. This should translate into better EPS growth, providing a boost to Market Value B+ the stock. The stock's forward P/E of 24.85, based on its earnings estimate for the next four quarters, represents a premium to the S&P 500 index's forward P/E of but is lower than its trailing P/E of Therefore value could apparently be found in the company's future earnings growth even though relative to the market the stock might not seem cheap (the fundamentals may already be factored into the price). But assuming the company remains fundamentally strong, the stock might have further room to run, or at least be a relatively safe place to be if earnings estimates materialize into actual reported results. 's are trading at 7.42 times their book value, which is based on the company's stockholders' equity. However, MarketGrader's price to book value analysis is based on a company's tangible book value, which excludes goodwill and other intangibles from its assets. In this case, s' intangible assets of $93.30 billion exceed its $89.65 billion in stockholders' equity by $3.66 billion, which means its tangible book value is negative. This makes the shares' price to tangible book ratio meaningless. Thus, part of the risk of owning the company's shares lies in the possibility of a significant write-down of its intangible assets, which would automatically make its shares much more expensive than they currently appear to be. Its shares seem reasonably priced at times the $5.18 in cash flow per share generated by the company over the last twelve months, if only because its overall fundamentals are pretty healthy. Its shares also trade at 7.05 times its trailing 12-month sales, a small 16.88% discount to the Packaged Software industry average price to sales ratio of Finally, from a value perspective, we look at how much bigger the company's market capitalization is than its latest operating profits after subtracting taxes. Based on this measure 's $ billion market cap is an acceptable valuation, representing a modest multiple of times its latest quarterly net income plus depreciation. P/E Ratio 12 Mo. Tr. 09/30/ Optimum P/E Ratio Forward P/E Ratio S&P 500 Forward P/E Ratio Price to (Tangible) Book Ratio Price-to-Cash Flow Ratio Price/Sales Ratio

3 Profitability A Profitability Record Is Excellent Across the Board Suggesting a Very Well Managed Operation is a very profitable company with strong overall Asset Utilization A indicators in this section of our analysis. The company's different measures of return to shareholders and margins are typically above those Capital Utilization A of its peers. In the last four quarters earned a profit Operating Margins A of $23.09 billion, equivalent to 24.71% of its sales in the period. The Packaged Software industry had an average operating margin of 15.39% Relative Margins A+ in the period. The company's operating margin of 28.09% exceeded that average by 67.09%. 's return on equity--an Return on Equity A- important measure used by MarketGrader to gauge management efficiency--is very strong, at 25.76% based on how much the company Quality of Revenues B has earned in the last year. This represents an improvement from the year-earlier 23.54% return on equity, a very healthy sign of profitable growth. The company manages its capital structure very conservatively, based on a 0.99 debt to equity ratio, which could be raised significantly if needed given the company's strong performance. Its long term debt, which accounts for 46.96% of total capital seems like an optimal amount of leverage to invest in what is a very profirable business. 's $40.26 billion in twelve month trailing core earnings, or EBITDA, shows a remarkable increase of 35.49% from the twelve months ended a year earlier, in which its core operations generated $29.72 billion. EBITDA is used to measure the company's true earnings power by including interest costs, income taxes, depreciation and amortization, all non-operating charges, which are nevertheless accounted for in several EPS and net income measures of our fundamental analysis. Cash Flow A- Company's Cash Flow Indicators Are Solid Across the Board but Offer Some Room for Improvement showed a small improvement in its quarterly cash Cash Flow Growth B- flow during the latest period, in which it grew by 7.72% to $12.44 billion from the $11.55 billion reported in the same period last year. While very EBIDTA Margin A healthy, this latest growth rate is significantly lower than the 11.35% Debt/Cash Flow Ratio A+ increase in twelve month trailing cash flow compared to the year earlier period, underscoring a slowdown in the company's core operations. This Interest Cov. Capacity A+ could lead to lower earnings expectations and consequently a lower valuation for the stock. Even though the company has $88.75 billion in Economic Value B total debt, its net debt is virtually zero since it has $ billion in cash on hand; and since it generated $11.21 billion in earnings before interest, Retention Rate A+ taxes, depreciation and amortization last quarter, it's safe to say its liquidity is remarkable. Therefore the company's debt is not only very manageable with its own cash flow but could be increased if it wanted to pursue strategic growth opportunities. The company also has the ability to enhance shareholder returns through dividends or by repurchasing its own shares, boosting the future value of its earnings. Even more positive is the fact that during the last 12 months while the company's cash on hand increased 1.12% from last year's $ billion, its leverage actually fell, with total debt as a percentage of total capital now at 49.75% compared to 51.83% a year ago. MarketGrader's Economic Value indicator looks at the company's returns on invested capital after measuring the cost of obtaining it and of keeping investors' capital tied up in its business. In this case, had $ billion in invested capital as of its most recently reported quarter, on which it generated a 15.53% return based on 12-month trailing operating income. Its total after tax cost of capital was 8.62% during the same period, most of it associated with its weighted cost of equity, which was 7.43% vs. its 1.19% weighted cost of debt. Deducting these costs from the total return on investment translates into 's economic value added (EVA) of 6.91%. While not outstanding, this represents and acceptable true economic profit after accounting for both operating and capital costs. The company increased its quarterly common dividend on September 30, 2017 by 7.69%, to $0.420 cents a share from $0.390 cents. It has paid a dividend for at least 14 years and, based on this latest payout, the stock is currently yielding 1.86%. paid out a total of $12.05 billion in common dividends during the last 12 months (ended last reported quarter), which accounted for 29.82% of its cash flow and 52.18% of what it earned in the period after taxes. This payout was slightly lower than what it paid out during the 12 months ended just a quarter earlier, or 55.86% of total earnings. Combined with the company's generally healthy fundamentals, the recent reduction alleviates concerns about the company's outlays growing faster than its cash flow, which could damage its balance sheet and contribute to lower overall grades. Cash Flow Qtrly. 09/30/2017 $12.4B Cash Flow Qtrly Year Ago $11.5B Cash Flow 1 Yr. Chg. 7.71% Cash Flow 12 Mo. Tr. Latest $40.4B Cash Flow 12 Mo. Tr. 3Y Ago $32.4B Cash Flow 12 Mo. Tr. 3Y Chg % Free Cash Flow Last Qtr. $10.3B Economic Value Total Invested Capital $178.4B Return on Inv. Capital 15.53% Weighted Cost of Equity 7.43% Weighted Cost of Debt 1.19% Total Cost of Capital 8.62% Economic Value Added 6.91% 3

4 Profile Microsoft Corp. develops and markets software, services, and hardware that deliver new opportunities, greater convenience, and enhanced value to people's lives. The company's products include operating systems for personal computers, servers, phones, and other intelligent devices; server applications for distributed computing environments; productivity applications; business solution applications; desktop and server management tools; software development tools; video games; and online advertising. It also designs and sells hardware, including the Xbox 360 gaming and entertainment console, Kinect for Xbox 360, Xbox 360 accessories, and Microsoft PC hardware products. The company operates its business through five segments: Windows & Windows Live, Server & Tools, Online Services, Microsoft Business, and Entertainment & Devices. The Windows & Windows Live segment develops and markets PC operating systems, related software and online services, and PC hardware products. The Server and Tools division segment develops and markets server software, software developer tools, services, and solutions that are designed to make information technology professionals and developers and their systems more productive and efficient. The Server and Tools product and service offerings include Windows Server, Microsoft SQL Server, Windows Azure, Visual Studio, System Center products, Windows Embedded device platforms, and Enterprise Services. The Online Services segment develops and markets information and content designed to help people simplify tasks and make more informed decisions online, and that help advertisers connect with audiences. Online Services offerings include Bing, MSN, adcenter, and advertiser tools. The Microsoft Business segment develops and markets software and online services designed to increase personal, team, and organization productivity. The Microsoft Business segment offers Microsoft Office system, comprising mainly Office, SharePoint, Exchange, Lync, and Office 365 and Microsoft Dynamics business solutions. The Entertainment & Devices division develops and markets products and services designed to entertain and connect people. The Entertainment & Devices s MarketGrader Dilution Analysis Impact of Change in Shares on EPS - Q Dilution Summary *EPS Latest $0.84 *EPS Year Ago $0.60 EPS Change 1 Yr. 42% C. Shares - Latest(M) 7,799 C. Shares - Yr Ago(M) 7,876 C. Shares - 1Yr Chg. (1%) EPS if Yr. Ago Shares $0.83 EPS Chg. if Yr. Ago 40% EPS Loss from Dilution $0.01 *Earnings per share are based on fully diluted net income per share excluding extrodinary items. This number may not match the headline number reported by the company. Key Facts: One Microsoft Way Redmond,WA Phone: Biggest Company in Sub-Industry (MSFT) Grade Market Cap:$ billion Smallest Company in Sub-Industry Labrador Technologies Inc Grade 13.9 Market Cap:$0.73 million Income Statement Last Qtr (09/2017) 12 Mo. Trailing Revenue $24.4B $93.4B Op. Income $7.6B $26.2B Net Income $6.6B $23.1B *EPS $ *Earnings per share are based on fully diluted net income per share excluding extrodinary items. This number may not match the headline number reported by the company. Balance Sheet Total Assets Total Debt Latest $249.1B $88.7B Stockholders Eq. $89.6B All numbers in millions except EPS Ratios Price/Earnings (12 mo. trailing) Price/Tangible Book Price/Cash Flow Price/Sales 7.05 Debt/Cash Flow Return on Equity 25.76% Gross Margin (12 mo. trailing) 66.11% Total Assets Intangible Assets Long Term Debt Total Debt Book Value Enterprise Value $249.1B $93.3B $79.4B $88.7B $89.6B ($49.7B) '12 '13 '14 '15 '16 '17 Qtr Qtr Qtr Qtr Operating Margin (12 mo. trailing) 28.09% Net Profit Margin (12 mo. trailing) 24.71% 4

5 Top Down Analysis Technology Stocks in Sector: 783 Buys: 134 (17.11%) Holds: 105 (13.41%) Sells: 544 (69.48%) No. of stocks at: 52-Wk. High: Wk. Low: 26 Above 50 & 200-day MA: 302 Below 50 & 200-day MA: 248 Packaged Software Stocks in Sub-Industry: 109 Buys: 14 (12.84%) Holds: 12 (11.01%) Sells: 83 (76.15%) No. of stocks at: 52-Wk. High: 3 52-Wk. Low: 7 Above 50 & 200-day MA: 41 Below 50 & 200-day MA: 38 # Ticker Grade Sentiment Name Price Next EPS 1 MU P Micron Technology, Inc. $ /28/ AAOI N Applied Optoelectronics, Inc. $ /09/ YY P YY, Inc. Sponsored ADR Class A $ /08/ LRCX N Lam Research Corporation $ /25/ DAIO N Data I/O Corporation $ /01/ MKSI N MKS Instruments, Inc. $ /31/ TER P Teradyne, Inc. $ /24/ AMAT N Applied Materials, Inc. $ /14/ UCTT N Ultra Clean Holdings, Inc. $ /20/ NVI.CA N Novra Technologies Inc. $ /11/ MSFT 1 N $ /31/2017 # Ticker Grade Sentiment Name Price Next EPS 1 MSFT 1 N $ /31/ PAYC N Paycom Software, Inc. $ /07/ FICO P Fair Isaac Corporation $ /07/ SABR N Sabre Corp. $ /02/ QLYS N Qualys, Inc. $ /03/ INTU N Intuit Inc. $ /23/ MANH N Manhattan Associates, Inc. $ /30/ VEEV P Veeva Systems Inc Class A $ /06/ ENGH.C N Enghouse Systems Limited $ /13/ ADBE N Adobe Systems Incorporated $ /14/ Price Trend. A+ 2. Price Momentum. B 3. Earnings Guidance. B 4. Short Interest. N/A 6.5 Copyright 2010 MarketGrader.com Corp. All rights reserved. Any unauthorized use or disclosure is prohibited. Neither the information nor any opinion expressed constitutes an offer to buy or sell any securities or any options, futures or other derivatives related to such securities ("related investments"). The information herein was obtained from various sources; we do not guarantee its accuracy or completeness. This research report is prepared for general circulation and is circulated for general information only. It does not have regards to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. MarketGrader does not make markets in any of the securities mentioned in this report. MarketGrader does not have any investment banking relationships. MarketGrader and its employees may have long/short positions or holdings in the securities or other related investments of companies mentioned herein. Officers or Directors of MarketGrader.com Corp. are not employees of covered companies. MarketGrader or any of its employees do not own shares equal to one percent or more of the company in this report. 5