Microsoft Corporation (NASDAQ:MSFT) may be undervalued, and its stock could be worth over $500 per share, according to projections based on its massive free cash flow (FCF). The analysis suggests a potential upside of 39% or $518 per share, driven by an estimated FCF of $96 billion in the next 12 months.
Microsoft’s latest financial data, ending September 30, showed a robust FCF of $20.7 billion for the quarter, a YoY increase of 22%. With a 37% FCF margin relative to total revenue, it’s projected that if sales reach $243 billion in the fiscal year ending June 30, FCF could rise to $90 billion. Analysts’ forecasts for the fiscal year ending June 2025 estimate $102.4 billion in FCF, resulting in an average FCF estimate of $96.2 billion over the next 12 months.
The market currently values Microsoft with a 2.28% FCF metric based on its last 12 months (LTM) FCF of $63.226 billion and a market capitalization of $2,773 billion. Using this metric, the NTM FCF estimate of $96.2 billion suggests a potential market value of $3,848 billion, a 38.8% increase over the current market cap.
The analysis proposes a conservative FCF yield of 2.5%, resulting in a market value estimate of $3,848 billion and a potential 39% increase in MSFT stock value. This sets a price target of $518 per share.
Existing shareholders are presented with an opportunity to generate extra income while waiting for the stock to reach its projected target by selling short out-of-the-money (OTM) put options. The analysis recommends focusing on puts with near-term expiration, such as the Dec. 29 period, providing an annualized expected return (ER) of 9.27% for a $357.50 strike price put and 4.80% for a $350 strike price put.
In summary, the analysis suggests Microsoft’s stock is undervalued, with a potential 39% upside, and existing investors can capitalize on this opportunity by shorting OTM put options for additional income.
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Author Faith Yakubu 
