I am recommending one of the best-known and most reliable cash flow generators in the world. It is down 40% from its high, but it’s also growing double digits and trading at its cheapest valuation in five years, asserts Adam Johnson, growth stock specialist and editor of Bullseye Brief.
Microsoft Corp. (MSFT) is the world’s second largest company by market cap behind Alphabet (GOOGL). You may think of Microsoft as the operating system loaded onto your PC from the 90s, but today it’s so much more.
Cloud-enabled software now accounts for about half of revenues, while legacy Windows installations on individual machines represent only about a tenth of the business. Its ground-breaking Azure product provides an entire ecosystem in the cloud, so large enterprises can run everything remotely. Microsoft’s portfolio also includes LinkedIn, Halo gaming and Bing search.
Recently reported Q2 revenues grew 11% YoY, and while corporate IT budgets may be under pressure, Gartner still forecasts 5% spending increases for 2023. Microsoft guidance implies double-digit eps growth. Against this positive backdrop, shares trade at their cheapest valuation in five years.
We don’t often get to buy an industry leader down 40% from the high, but current volatility is providing just such an opportunity. Calculating Microsoft’s price target is straightforward, given the company’s predictable cash flow and earnings. I use two different methods.
The first involves plugging several key assumptions into Bloomberg’s Discounted Cash Flow Model, which yields a target of $375. The second is simply a forward P/E calculation, where I multiply 2025 consensus earnings estimates by the historic price/earnings ratio to arrive at $386. The average of these two is $380, my target.
I like owning Microsoft in the low $200s, which coincides with a long-term support line and the bottom of its recent downward. I’m betting the upward trend line matters more, especially if markets pivot on lower inflation data in coming weeks. There may also be additional support at $200, should near-term weakness persist.