Microsoft’s Powerful Free Cash Flow Will Power MSFT Stock Higher

  • Microsoft (MSFT) stock is down 21% YTD, but over the last year, it is more or less flat with a near 1% decline before dividends.
  • The software company will likely report good earnings for its fiscal Q4 ending June 30.
  • MSFT stock is worth at least 15% more based on its average P/E multiple in the last 5 years and up to 44% more based on its typical 33% FCF margin on its forward sales and a 3% FCF yield.
MSFT stock - Microsoft’s Powerful Free Cash Flow Will Power MSFT Stock Higher

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Microsoft (NASDAQ:MSFT) is due to release its earnings for its fiscal year ending June 30 around Aug. 21. MSFT stock is down 21% year-to-date (YTD), but off just 1% in the past year. Based on analysts’ forecast and its powerful free cash flow (FCF), it could move substantially higher.

Analysts forecast that its earnings-per-share (EPS) will be $2.30 for the quarter compared to $2.22 last quarter. And, for the full year to June 30, analysts project EPS of $9.30, up 15.5% over the prior year.

This is also what they project going forward. For the year to June 30, 2023, they project a 15% higher EPS at $10.70 per share. This puts MSFT stock on a forward multiple of 24.2 times.

That is lower than its historical 5-year average forward price-to-earnings multiple, according to Morningstar. This puts Microsoft’s average P/E at 27.94x. In other words, if MSFT stock were to rise to its historical average the stock would rise by 15.45% (i.e., 27.94x/24.2x-1). That puts its value at $298.86, which is 15.45% over yesterday’s price of $258.86.

Ticker  Company Current Price
MSFT Microsoft $264.17

Microsoft’s Powerful Free Cash Flow

Microsoft breaks its revenue down into three main categories. They are Productivity and Business Processes (mostly Office and LinkedIn), Intelligent Cloud (server products) and More Personal Computing (Windows, etc.). Each of these are roughly evenly split, and each of them is growing.

The main point, though, is that Microsoft is spewing forth a ton of free cash flow (FCF). Last quarter alone it generated $20 billion in FCF on revenue of $49.36 billion. That works out to an FCF margin of 40.6%. This is even higher than its prior trailing 12 months (TTM) FCF margin of 33%.

We can use this to model the stock’s valuation. For example, assuming Microsoft makes $227 billion as analysts forecast, its FCF could reach about $80 billion. That assumes roughly a 35% FCF margin for the company over the next 12 months.

So if we use a 3% FCF yield to value the company, its target market capitalization will be $2,666 billion. That works out to a potential 44% gain over its present $1.85 trillion market cap.

Where This Leaves Investors in MSFT Stock

This implies that MSFT stock could rise to $372.76, up 44% from its June 23 price.

Moreover, we can average the two valuations using the P/E value target price of $298.86 and the FCF target price of $372.76. The result is a target price of $335.81, or 29.7% over yesterday’s price. In other words, based on average analysts’ projections, it is reasonable to assume that MSFT stock could rise almost 30% from here.

This is close to where other analysts have their price targets. For example, Refinitiv’s survey of 46 analysts, as shown by Yahoo! Finance, is a target price of $357.75 per share. That works out to a potential upside of 38% from here today.

In addition, TipRanks reports that analysts have a price target of $353.88. This is close to the Refinitive price target as well. This is also similar to the Seeking Alpha survey of 47 analysts whose average price target is $358.43.

The bottom line here is that MSFT stock is likely to move higher over the next year, at least 30% or more, if analysts’ projections pan out.

On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Mark Hake writes about personal finance on mrhake.medium.com, Newsbreak.com and Beehiiv.com.


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