Microsoft’s (NASDAQ:MSFT) stock has experienced a surge since its late October earnings report, but its robust free cash flow (FCF) suggests it could be valued at over $446 per share, indicating a 21% increase from the current morning trading price of $369 on November 14.
The $100 Billion FCF Projection
The prediction of $100 billion in FCF for the year is based on a 37% FCF margin estimate (FCF/sales) and sales forecasts for the fiscal years ending September 30, 2023, and 2024. Analysts surveyed by Seeking Alpha anticipate sales to reach $242.69 billion this year and $276.21 billion next year, resulting in an average 12-month forward sales estimate of approximately $260 billion.
Applying the 37% FCF margin from the last two quarters to this sales estimate yields a projected FCF of $96.2 billion for the next 12 months. Rounded up to $100 billion, this projection suggests that MSFT stock could be undervalued, indicating the potential for a higher valuation.
MSFT Stock Valuation: Over $446
Using a 3% FCF yield metric implies that Microsoft, with $100 billion in FCF, could be worth $3.33 trillion (i.e., $100b/0.033), equivalent to a 33.3x FCF multiple. With the current market capitalization at $2.75 trillion, this suggests a potential 21% increase in MSFT stock value.
By multiplying the current price of $369 by 1.21, we arrive at a price target of $446.49 per share.
Additionally, Microsoft’s share repurchase program, aiming to buy back $60 billion in shares, indicates further potential for stock appreciation.
Generating Additional Income for Shareholders
Given MSFT’s low dividend yield (below 1.0%), existing shareholders may consider creating pseudo income while awaiting higher stock prices. Selling short out-of-the-money (OTM) puts can be a strategy to achieve this.
For instance, selling short the $320 strike price puts with a 1% yield and minimal risk proved to be a successful trade. Investors could consider repeating this strategy, with the $355 strike price puts (0.66% yield) for the December 8 expiration period.
By repeating this trade every three weeks for a year, investors could potentially achieve a total expected return of 11.2%. While not guaranteed, shorting OTM puts offers a strategy for additional income without risking existing shares.
In conclusion, with Microsoft’s formidable free cash flow and FCF margins, shorting near-term OTM puts for additional income appears to be a sensible approach for existing shareholders.
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