On Monday, Loop Capital, a financial services firm, has increased the price target for Microsoft Corporation (NASDAQ: NASDAQ:MSFT) shares to $550, up from the previous $500. The firm has also maintained a Buy rating on the stock.
The adjustment comes amidst expectations of robust growth driven by Microsoft's investments in generative artificial intelligence (GenAI). According to InvestingPro data, analyst consensus remains highly bullish with targets ranging from $420 to $650, while the stock currently trades near $437. Based on InvestingPro's Fair Value model, Microsoft appears to be trading close to its fair value.
Microsoft's shares are currently valued at a 45x/44x forward EV/FCF multiple for calendar years 2024 and 2025, compared to an average of 44x/38x for its large-cap software peers with market capitalizations over $100 billion. Loop Capital notes that both their own and Wall Street's free cash flow (FCF) estimates for Microsoft may be understated due to significant capital expenditures required for GenAI initiatives.
As a result, the firm believes that Microsoft's shares warrant a higher premium than its peers. InvestingPro analysis reveals Microsoft's impressive financial health score of "GREAT," with particularly strong profitability metrics and robust revenue growth of 16.44% over the last twelve months.
On a price-to-earnings (P/E) basis, Microsoft is trading at 36x/33x for the same periods, against a peer average of 44x/38x. These P/E ratios are influenced by minimal margin improvement due to ongoing investments. Loop Capital suggests that a discounted cash flow (DCF) model is the most appropriate valuation method for Microsoft, taking into account the anticipated modest FCF growth in the near term and accelerated growth in the medium term due to GenAI-related investments.
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The DCF model used by Loop Capital assumes Microsoft can achieve a 17% compound annual growth rate (CAGR) in free cash flow until fiscal year 2028, followed by an increase to 30% in FY28 and 40% in FY30. The model then projects a decline to a terminal growth rate of 4.5% from FY31 to FY35, with a cost of capital at 12.8%.
Based on these assumptions, the model yields a net present value of approximately $546 per share of free cash flow. After accounting for a net cash balance of $4 per share, the firm has established a total net present value of about $550 per share.
Loop Capital's revised price target of $550 implies that Microsoft can sustain a 22.5% CAGR in free cash flow over the next six years, which the firm believes accurately reflects the company's growth potential in free cash flow.
In other recent news, UBS analysts raised their price target on Microsoft Corporation shares to $525.00, up from the previous target of $500.00, and reiterated a Buy rating. This change reflects anticipated growth in Microsoft's Azure services. The firm's commentary highlighted several key points influencing the decision, including an expected rollout of new Azure capacity later in the year and a trend of declining prices for Azure OpenAI API.
Microsoft's CEO recently addressed the company's chip supply situation, indicating that the company no longer faces chip supply constraints. This contrasts with the position of AI chip supplier Nvidia (NASDAQ:NVDA), who expects demand for their Blackwell chips to exceed supply for several quarters into 2025.
The United States is preparing to introduce new regulations that would designate tech companies, including Microsoft, as global gatekeepers for the distribution of artificial intelligence (AI) chips. This initiative follows a pattern set by a national security agreement signed in April between Microsoft and the U.S. government.
Microsoft is also part of a group of leading technology companies, known as the Magnificent Seven, which has surpassed $18 trillion in collective valuation. Nigel Green, CEO of deVere Group, expects these tech behemoths, including Microsoft, to maintain their market dominance into 2025.
Finally, at Microsoft's annual meeting, shareholders voted against a proposal that would have prompted the company to consider adding Bitcoin to its balance sheet. The board explained that the company's management already conducts thorough evaluations of investable assets, including cryptocurrencies, to ensure liquidity and operational funding.
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