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Microsoft Stock: Rising Free Cash Flows, Bullish Outlook

Microsoft (MSFT) is no longer the start-up once it was, growing by leaps and bounds.

It is still growing at healthy rates though, and creating plenty of free cash flow that could drive its shares higher. I am bullish on the stock.

On September 15, the software giant announced a $60-billion share buyback program and an 11% dividend hike. Share buybacks and dividend hikes are usually bullish for listed companies in the long run. (See MSFT stock charts on TipRanks)

Strong Growth, Rising Free Cash Flow

Large companies do not usually grow their revenues at double-digit rates for a long time. Microsoft’s revenues, however, increased by 14.3% in 2018, 14% in 2019, 13,6% in 2020, and 17.5% in 2021.

Free cash flow increased at an even faster pace: 18.6% in 2018, 18.2% in 2019, and 24.1% in 2020. Free cash flow is the net income left after companies invest in supporting their operations, and reproducing their assets.

These funds can be deployed in various ways that can enhance shareholder value. That’s why equity analysts pay close attention to this critical financial metric.

Wall Street has Taken Notice

Wall Street has taken notice of Microsoft’s strong growth, and rising free cash flow. As a result, the software giant’s shares have gained 453.8% in the last five years.

Meanwhile, investor sentiment is running high, as the valuation begins to look a little bit stretched. For example, Microsoft’s shares are trading at 33 times of next six-month earnings, about twice the S&P 500 average.

Plenty of Opportunities, Strong Moats

Microsoft’s stellar performance is the result of plenty of opportunities and strong moats.

Microsoft’s opportunities arise from riding the second “wave of digitalization,” as its CEO Satya Nadella explained.

“What we have witnessed over the past year is the dawn of the second wave of the digital transformation sweeping every company and every industry,” he said. “Building their digital capability is the new currency driving every organization’s resilience and growth. Microsoft is powering this shift with the world’s largest and most comprehensive cloud platform.”

Meanwhile, Microsoft has strong moats (barriers to entry to protect and secure its competitive advantage), like economies of networking, the benefits associated with an extensive network of users, and “bundling,” the packaging of different products to be sold to the same customers.

While Microsoft’s moats help keep competition out, they also provide the company with a great deal of pricing power, as evidenced by its decision to raise the price of its products last month.

Analyst’s Take

Equity analysts are on the same side of Wall Street. They rate Microsoft a Strong Buy, with an average price target of $334.55. The average MSFT price target implies 13.1% upside potential.

Bottom Line

At the right time, Microsoft is in the right place with the right business model to grow its business, and generate plenty of free cash flow to boost shareholder value.

Disclosure: At the time of publication, Panos Mourdoukoutas had a position in Microsoft.

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