Microsoft Corp (MSFT) stock has risen over 7% in the last month and is well up from its April lows. But, is it still a buy here? Its strong free cash flow and FCF margins show it is. We estimate a 24% higher value at $582 per share over the next year.

MSFT is at $469.69 in midday trading on Tuesday, June 10. This is near its recent peak of $472.75 on June 9.

But it could still be worth 24% more at $582 per share. This is based on analysts' revenue estimates and the company's recent FCF margins. This article will show how that works out.

Strong Free Cash Flow

Last quarter ending March 31, Microsoft's revenue rose 13.3% Y/Y to $70.066 billion, and its free cash flow (FCF) was roughly flat (down 3%) at $20.3 billion from $20.965 billion last year.

This was due to much higher capex spending. Its capital expenditures for the quarter were $16.75 billion vs. $10.95 billion a year ago.

Nevertheless, the FCF margin was still strong at 29% - i.e., $20.3b FCF / $70.66b revenue (even though this was lower than last year's 33.9% margin). The point is that Microsoft is still generating strong FCF even after significantly higher capex spending (mostly for its AI buildout).

This is useful for forecasting its FCF going forward.

For example, analysts now expect revenue will continue to rise. Seeking Alpha's survey shows that for the year ending June 30, 2025, 53 analysts project revenue will be $279.02 billion and $316.33 billion for the June 2026 fiscal year. That implies a next 12-month (NTM) run rate revenue of almost $300 billion (i.e., $298 billion).

That is over 21% higher than the fiscal 2024 revenue of $245.1 billion.

As a result, its FCF projection on an NTM basis, and using a 29% FCF margin, could be significantly higher:

   $298b x 0.29 = $86.42 billion FCF

This is significantly higher than the $74.1 billion it made in FY 2024. It's also 24.5% higher than the $69.365 billion FCF Microsoft made in the last 12 months (according to Seeking Alpha data).

Target Prices for MSFT Stock

As a result, we can project a higher valuation for MSFT stock. One way to do this is to use an FCF yield metric.

This assumes that the company theoretically pays out 100% of its FCF as a dividend. The resulting dividend yield is a way to measure its value. For example, using today's market cap of $3.489 trillion, its LTM FCF yield is about 2.0%:

   $69.365b LTM FCF / $3,489 billion mkt cap = 0.01988 = 2.0% FCF yield

As a result, we can use that FCF yield metric to value its forecasted FCF:

  $86.42b NTM FCF / 0.02 = $4,321 billion future mkt cap

This is +23.85% higher than today's $3,489 mkt cap. In other words, MSFT is worth almost 24% more:

  1.2385 x $469.69 p/sh = $581.71

Given that Microsoft is buying back shares, this could push its target value to at least $582 per share, or +24% higher.

Analysts Say MSFT is Undervalued

Analysts tend to agree. For example, Yahoo! Finance's survey shows an average price target from 61 analysts of $512.04, and Barchart shows $515.74.

Similarly, AnaChart.com, which tracks recent analyst price recommendations, shows an average price target of $530.74 from 37 analysts.

The bottom line is that MSFT looks undervalued, both from an FCF margin/FCF yield standpoint and also from sell-side analysts' price targets.

One way to play this is to sell short out-of-the-money (OTM) puts. That way, an investor can set a lower buy-in target and still get paid while waiting to buy.

Shorting OTM Puts

For example, look at the July 18 expiration period, 38 days from now. It shows that the $450 strike price, about 4% below today's price, has a midpoint premium of $4.10.

That means that an investor who does a “Sell to Open” order can make an immediate yield of almost 1.0% (i.e., $4.10/$450 = 0.91%).

This allows an investor to set a lower buy-in price and still get paid while waiting for the stock to fall 4% to the strike price.

The investor will also have a lower breakeven point even if MSFT falls to $450:

  $450.00 - $4.10 = $445.90 = 5% below today's trading price

The bottom line is that MSFT is undervalued, and shorting OTM puts is one way for value investors to set a lower buy-in price.

On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.