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Microsoft (NASDAQ:MSFT) could reach $ 400 per share and have a market capitalization of $ 3 trillion. This forecast for MSFT stock to grow by over 41% is based on its huge Free Cash Flow (FCF) and high FCF margins. Investors will have a better idea when Microsoft releases its results for the fiscal fourth quarter ending June 30 on July 27.
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Keep in mind that Microsoft is up 26% year-to-date through July 15, when it was $ 281.06 per share. In addition, since the end of March, it has increased by 19%. This is likely due to the huge generation of FCFs the company achieved in its fiscal third quarter ending in March.
In my last post on Microsoft on May 27, I argued that MSFT stock was worth 52% more at $ 383 per share. That was when the stock was at $ 251.07. I used an FCF at run rate method to evaluate Microsoft. Since then, it has risen 11.9% to $ 281.06. I’m using a slightly different method to value the stock now, giving it a target price of $ 400, up 41.5%.
Estimate Microsoft’s future FCF
In its fiscal third quarter, revenue jumped 19% year-on-year revenue grew 31% to $ 17 billion. Its non-GAAP (generally accepted accounting principles) earnings per share (EPS) increased 39% to $ 1.95.
Additionally, Microsoft’s FCF grew 24% in the past year to $ 17.09 billion. That’s a whopping 41% of its $ 41.7 billion in quarterly revenue for the March quarter. We can use this 41.4% margin figure to estimate its future FCF.
Most companies are lucky if they can get a 20% FCF margin. About 41% of every dollar Microsoft sells ends up in pure cash profit. This is after all capital expenditures, changes in working capital, selling and administrative expenses, taxes and cash payments have been removed. This means that 41% of those sales dollars are “free†for share buybacks, debt payments, dividends, acquisitions or just to be stored on one’s balance sheet.
We can use it to estimate Microsoft’s FCF in the future. For example, analysts selected by Seeking Alpha predict that sales for the until June 2022 will reach $ 185.71 billion. Using its 41% FCF margin, we can estimate that the FCF will reach $ 76.1 billion by June 2022.
Source: Mark R. Hake, CFA
As the table on the right shows, this implies that by June 2022, the FCF will account for 41% of its $ 185.7 billion in estimated sales. This also represents a growth of 11% compared to 2021 and 68% compared to the 2020 FCF figure.
Use FCF Microsoft Return to Value
Since this FCF margin is so high, the market values ​​MSFT stock highly. If we divide his 12-month rolling annual FCF (TTM) by the market cap, we can deduce his FCF return.
For example, using in the last months (TTM) through March 31, Microsoft generated $ 53.08 billion in FCF. This can be seen on the page that Seeking Alpha provides for TTM Operating Cash Flow (CFFO) of $ 72.703 billion. Then we subtract $ 18.914 billion in capital expenditure, the TTM FCF was $ 53.08 billion.
So if we divide that $ 53.08 billion by Microsoft’s market cap of $ 2.12 trillion, the FCF return is 2.54%.
Source: Mark R. Hake, CFA
So if we apply the 2.54% FCF return to the 2022 forecast of $ 76.1 billion for June 2022, the expected target market cap is $ 2,996 billion ($ 76.1 billion / $ 2,996 billion of dollars). It’s very close to $ 3 trillion. That’s 41.3% of the current market cap of $ 2.12 trillion. It also implies that MSFT stock is worth $ 397.10, which is close to $ 400 (less than 1% more).
Where that leaves MSFT Stock
When Microsoft releases its second quarter results and associated cash flow statement, we may revise this calculation. Based on the height of its FCF margin, we might be able to increase the target to over $ 3 trillion.
Keep in mind that we are using his historic FCF performance from the TTM ending March 31. Once we receive the new quarterly results, we can reset the FCF yield number. Keep in mind that the higher the FCF dollar figure, the higher the FCF performance measure will be. This means that the target price of the MSFT share will be lower.
Nonetheless, MSFT stock is expected to reach $ 3 trillion in market value next year if its FCF continues to rise. Look for MSFT to hit $ 400 or 41.5% above today’s price.
As of the publication date, Mark R. Hake does not hold any position in any of the stocks mentioned in the article. The opinions expressed in this article are those of the author, submitted to InvestorPlace.com Publication guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and run the Total Value of Return Guide that you can consult here.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
