Microsoft's shares were worth $3,697 billion on 24 September 2026. Free cash flow is the cash a business makes after capital spending. Our ten-year forecast of Microsoft's free cash flow is worth 22% of that price in today's money. The other 78% has to come from after year 10.
That later part is called the terminal value. Here is how it is worked out, why it moves so much and how much of the Magnificent Seven (Mag7) US tech giants' value rests on it.
What is terminal value? Terminal value is the worth of all of a company's cash flows after the last year of a forecast, rolled into one number. It sits inside a Discounted Cash Flow (DCF) valuation. In our Microsoft DCF it made up 57% of the total.
It is worked out in two ways. The perpetual growth method assumes steady growth forever. The exit multiple method uses a multiple of the final year's cash flow. Each implies the other.
Small changes move it a lot. With a 9.7% discount rate, the yearly return investors want, 2.5% growth forever is worth 14.2 times the final year's cash flow. 7% growth is worth 39.6 times.
On 24 September 2026, the Magnificent Seven (Mag7) US tech giants needed 72% to 97% of their market value to come from after year 10. That uses one shared growth path and discount rate for all seven.
What terminal value means in a DCF
A DCF adds up all the cash a company will produce in future, with each year shrunk back to today's money by a discount rate. The cash that counts is free cash flow: operating cash (the cash from running the business) minus capital spending on buildings, equipment and data centres.
In What Is a DCF? we forecast Microsoft's free cash flow for ten years, then added one number for every year after. That number, the terminal value, was 57% of our DCF value of $1,893 billion. The market price was about twice our DCF value. So the price needs even more from after year 10: 78%.
Method 1: the perpetual growth formula
The first method assumes free cash flow grows at a steady rate forever after the forecast ends. The formula is:
Terminal value = year-10 free cash flow × (1 + growth) ÷ (discount rate − growth)
The discount rate is the yearly return investors want for the risk. We use 9.7%, Microsoft's Weighted Average Cost of Capital (WACC), worked out in What Is WACC?.
Two limits apply to the growth rate:
It must stay below the discount rate. As growth nears the discount rate, the terminal value heads towards infinity.
It should stay at or below the long-run growth of the economy. A company that outgrew the economy forever would one day be bigger than the economy itself. US Gross Domestic Product grew 4.5% a year from 2000 to 2025 including inflation, according to the Bureau of Economic Analysis. It grew 2.1% once inflation is taken out. Free cash flow includes inflation, so 4.5% is the ceiling to test against.
Our Microsoft example used 2.5%.
Method 2: the exit multiple and the growth it implies
The second method assumes the business is sold at the end of year 10 for a multiple of that year's free cash flow.
The two methods are linked: a multiple can be turned into the growth forever it implies:
Growth = (multiple × discount rate − 1) ÷ (multiple + 1)
At a 9.7% discount rate:
15 times implies 2.8% growth forever.
20 times implies 4.5%, the economy's pace including inflation.
30 times implies 6.2%, above the economy's pace.
Going the other way, 2.5% growth forever equals a multiple of 14.2 times. An exit multiple is paid on year-10 cash flow, which is far larger than today's. Even 30 times year-10 cash flow assumes the company outgrows the economy forever.
How sensitive terminal value is to growth and the discount rate
Source: FRED (GDP); YX Insights
Each line shows the terminal value as a multiple of year-10 free cash flow at one discount rate: 8.7%, 9.7% or 10.7%. At 9.7%, 2.5% growth gives 14.2 times, while 7% growth gives 39.6 times. At 8.7%, 7% growth gives 62.9 times.
The lines curve upwards because growth eats into the gap between the two rates. In our Microsoft DCF, in year-10 money, raising growth from 2.5% to 3.5% lifts the terminal value 17%, from $2,746 billion to $3,220 billion. Cutting the discount rate from 9.7% to 8.7% lifts it 16%, to $3,189 billion.
Mag7 free cash flow and market value
The Mag7 are Apple, Microsoft, Alphabet, Amazon, Meta, Nvidia and Tesla. The table shows each company's free cash flow for its latest filed fiscal year and its market value on 24 September 2026. Fiscal years end in different months, so each is labelled.
Company | Latest filed fiscal year | Free cash flow | Market value, 24 Sep 2026 | Price-to-free-cash-flow |
|---|---|---|---|---|
Apple | FY2025, to 27 Sep 2025 | $98.8 billion | $4,902 billion | 50x |
Microsoft | FY2026, to 30 Jun 2026 | $67.0 billion | $3,697 billion | 55x |
Alphabet | 2025, to 31 Dec 2025 | $73.3 billion | $4,187 billion | 57x |
Amazon | 2025, to 31 Dec 2025 | $7.7 billion | $2,690 billion | 350x |
Meta | 2025, to 31 Dec 2025 | $46.1 billion | $1,981 billion | 43x |
Nvidia | FY2026, to 25 Jan 2026 | $96.7 billion | $5,412 billion | 56x |
Tesla | 2025, to 31 Dec 2025 | $6.2 billion | $1,493 billion | 240x |
Source: Company Form 10-K and 10-Q filings (SEC XBRL); YX Insights price data; YX Insights
Market value divided by free cash flow gives the price-to-free-cash-flow multiple. Five of the seven sit between 43 times (Meta) and 57 times (Alphabet). Amazon is at 350 times and Tesla at 240 times.
How much of each Mag7 price must come from after year 10
We give all seven the same path as our Microsoft DCF. Free cash flow grows 15% a year for five years. Growth then fades evenly to 2.5% by year 10. Every year is discounted at 9.7%. These are our teaching assumptions. In practice each company has its own. We also leave out cash and debt.
On that path, the ten years of cash are worth 12.0 times each company's latest free cash flow in today's money. Whatever is left of the market value has to come from after year 10.
Source: Company Form 10-K and 10-Q filings (SEC XBRL); YX Insights price data; YX Insights
For Meta, 72% of its market value has to come from after year 10. For Amazon, it is 97%. The dashed line marks 57%, the terminal value's share in our Microsoft DCF with 2.5% growth forever. Every Mag7 price asks more than that.
How much growth forever each Mag7 price needs
Source: Company Form 10-K and 10-Q filings (SEC XBRL); FRED (GDP); YX Insights price data; YX Insights
We turn the value needed after year 10 into an exit multiple. The formula above then turns that multiple into growth forever. Apple needs a year-10 multiple of 33.0 times, or 6.5% growth forever. Microsoft needs 37.8 times, or 6.9%. All seven sit above the economy's 4.5%. Amazon and Tesla need 9.3% and 9.2%, close to the 9.7% discount rate itself.
That does not prove the prices wrong. Each could make sense with faster growth for longer than our path, or a lower discount rate.
Why Amazon and Tesla stand out
Both look extreme because their latest free cash flow is small:
Amazon spent $131.8 billion on capital spending in 2025, out of $139.5 billion of operating cash. That left $7.7 billion on our measure. Amazon's own definition takes equipment sale proceeds and incentives off its capital spending. On that basis free cash flow was $11.2 billion.
Tesla made $14.7 billion of operating cash in 2025 and spent $8.5 billion, leaving $6.2 billion.
Microsoft, Alphabet and Meta spent between 56% and 63% of their operating cash on capital spending. Apple spent 11% and Nvidia 6%. A heavy building year shrinks the starting cash flow, which every later year, terminal value included, is built on.
How to read a terminal value
Three checks help with any DCF:
Find its share of the total. The higher it is, the less the forecast years matter.
Turn any exit multiple into growth. Then compare that growth with the economy's 4.5% a year.
Move growth and the discount rate one point each. Then show the answer as a range.
Terminal value is all the cash a company makes after the forecast ends, in one number. On 24 September 2026, it had to carry 72% to 97% of each Mag7 market value. Check the growth it assumes against the economy's 4.5% before trusting any DCF.
Learn more with YX Insights
This explainer is part of the YX Insights Academy. Each one takes a single idea and checks it against real data.
The same approach runs through everything else we publish:
Systematic Portfolio: ready-made portfolios for Macro & Megacaps and for Commodities. We publish the holdings and every change.
Multi-model Signals: a daily long-or-flat call on every name we cover. Each call shows how strongly our four models agree.
Research: company deep dives, macro commentary and essays on how we test.
Good places to start on the website:
Academy: more explainers like this one.
Start here: get our free weekly letter by email.
Macro & Megacaps Systematic Portfolio and Commodities: the two portfolios in detail.
Track record: live results since 3 August 2026, plus the ten-year backtest.
Upgrade: get the Systematic Portfolio, Multi-model Signals and research in full.
DISCLAIMER: This article is strictly educational. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.