MSFT Stock Is Worth 52% More at $383 From FCF Growth at Microsoft

Microsoft (NASDAQ:MSFT) is up more than 13% year-to-date as of May 26, and up over 37% in the past year. This is despite its huge market capitalization topping $1.89 trillion. My prediction is that MSFT stock is nowhere near its peak, despite its massive market valuation.

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I project that Microsoft will hit $383 per share sometime over the next year, or a gain of more than 52%.

This is based on the company’s growth as seen from its latest fiscal third-quarter earnings release. I will show you how I came up with this prediction for MSFT stock in this article.

MSFT Stock and Cloud-Based Growth

The title of its April 27 earnings press release says it all: “Microsoft Cloud Fuels Third Quarter Results.” The company is now truly transformed into a cloud-based software-as-a-service (SaaS) type company with huge consistent growth.

For the quarter ending March 31, 2021, revenue jumped 19% year-over-year (YoY) and operating income rose 31% to $17 billion. Its non-GAAP (generally accepted accounting principals) earnings per share (EPS) rose 39% to $1.95.

As Reuters pointed out, much of this was from grabbing market share in the booming market for cloud computing. In addition, earnings were driven by its Teams collaboration products and its LinkedIn social network site.

Moreover, the company’s Azure cloud service and server products grew 50% YoY during the quarter. This allowed Microsoft to gain market share against Amazon (NASDAQ:AMZN) and its Amazon Web Services (AWS) cloud service.

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Effect on Microsoft’s Free Cash Flow

The net result is that Microsoft produced $17.09 billion in quarterly free cash flow (FCF). This can be seen in the Seeking Alpha cash flow results page as well as the company’s cash flow statements at the end of the press release. For example, Q1 2021 cash flow from operations (CFFO) was $22.179 billion, less capex spending of $5.089 billion), resulting in $17.09 billion in FCF.

This FCF was 24.4% higher than a year ago. In the March quarter of 2020, the company produced $17.504 billion in CFFO, less capex spending of $3.767 billion, or $13.737 billion in total FCF. So the Q1 2021 $17.09 billion FCF was 24% higher than the $13.737 billion FCF a year ago.

This is all the more significant as Microsoft did not crimp on capex spending. It rose from $3.8 billion to $5.1 billion, or 34.4% more a year later.

In addition, the FCF during the last 12 months (LTM) was $53.789 billion, as seen in the very useful Seeking Alpha LTM page. This, again, is seen by subtracting the LTM $18.9 billion in capex spending from $72.7 billion in CFFO.

But going forward, Microsoft can expect to make a run rate of $17.09 billion in quarterly FCF. That works out to $68.36 billion annually. But this will be 27% higher than its first quarter LTM FCF of $53.789 billion.

In other words, the company’s inherent growth will power the company’s FCF higher. This has huge ramifications for its expected value.

What MSFT Stock Is Worth

Right now, Microsoft has an FCF yield of 2.846%. This is calculated by dividing its historical LTM FCF of $53.789 billion by its market value of $1.89 trillion.

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So, going forward we can say that its new market value should be 27% higher. This is because Microsoft’s expected $68.36 billion in run-rate FCF will result in a market value of $2.4 trillion (i.e., $68.36 billion / 2.846%).

But we need to make one more adjustment.

The run rate FCF assumes that each quarter the FCF will stay flat at $17.09 billion. But it is likely to grow. As we showed, it grew 27% last year. So even assuming a 20% growth rate on average, the annual FCF a year from now (looking back 12 months) will be $64.36 billion x 1.20. That results in a LTM FCF of $82 billion.

Now when we divide $82 billion by 2.846%, the new expected market value is $2.881 trillion. Wow! That assumes that MSFT stock will climb $1 trillion in market value from its $1.89 trillion market cap today. This represents a spike in MSFT stock of 52.4%.

Therefore, expect to see Microsoft stock at $383 per share some time over the next year or so. That is 52.4% higher than today. This assumes its cloud-based growth continues apace. This represents a superior ROI for most investors.

On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities 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 and runs the Total Yield Value Guide which you can review here.

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