Microsoft Reports Strong Profit and Cash Flow, Making OTM Puts Attractive 

Microsoft Stock

Microsoft Corp (NASDAQ:MSFT) announced robust profit growth and impressive free cash margins in its latest fiscal Q2 results ending Dec. 31. As a consequence, MSFT stock might see a 10% increase, reaching $449 per share. It remains an enticing short-put income opportunity for current investors and others.

As of today, MSFT stock is marginally down at $404.63 per share, a slight dip from its Jan. 30 closing at $408.59, in 2024.

Shorting the $377.50 put option expiring on Feb. 16 was suggested earlier, and those who followed the recommendation have already experienced favorable returns.

Microsoft’s Earnings And FCF Performance

Microsoft’s fiscal Q2 results (ending Dec. 31, 2023) indicated strong revenues and earnings, with sales reaching $62 billion, marking an 18% YoY increase. The operating margin stood at $27 billion, a robust 44%. Although slightly lower than the previous quarter’s $27.28 billion, this still represents a solid 48.3% operating margin.

Free cash flow (FCF) for the quarter reached $9.1 billion, a notable increase from the $4.9 billion reported a year ago. The decrease from last quarter’s $20.666 billion was attributed to the timing of capital expenditure.

To assess Microsoft’s financial health, it’s essential to consider full-year FCF figures and last-12-month (LTM) FCF margin metrics. Data from Seeking Alpha reveals Microsoft’s FCF for the last 12 months ending Dec. 31 was $67.5 billion, constituting a healthy 30% of its $227.6 billion LTM sales. This quarter’s FCF margin showed a growth of 110 basis points on an LTM basis, suggesting a potential rise to 32% over the next year.

Target Price For MSFT Stock

Analysts project sales for the year ending June 30, 2024, at $243.16 billion and $278.35 billion for the year ending June 2025. Applying a 32% FCF margin to the anticipated average run-rate of $260.8 billion in the next 12 months leads to a forecast of $83.5 billion in NTM free cash flow.

Using a 2.5% FCF yield metric, equivalent to a 40x multiple, suggests a market cap of $3,340 billion, 10% higher than its present market cap of $3.04 trillion. This implies a potential stock value of at least $449.50 per share.

Shorting OTM Puts For Income

Existing shareholders can generate additional income by selling short out-of-the-money (OTM) puts. The previously recommended $377.50 strike price put for the period ending Feb. 16, initially yielding 0.71%, has already produced profits for short sellers.

Currently, it’s possible to sell short the $390 strike price puts for Feb. 16 expiration at a $2.47 bid price, producing $247 in income for the $39,000 secured, or 0.633%.

With only 16 days until expiration, investors can potentially generate 5 to 6 times this amount over the next 90 days if repeated every two weeks. This translates to a quarterly yield of 3.17% or 3.80%, offering a promising income opportunity for existing shareholders. For those considering MSFT stock but not yet invested, a potential buy-in opportunity may arise if the stock falls to $390.00 in the next two weeks. Regardless, MSFT stock appears to have significant upside potential over the next 12 months based on its recent strong performance.

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