On a red day for the stock market, Microsoft (MSFT 2.73%) investors, at least, were happy to hear that CFRA analyst Angelo Zino raised his price target on Microsoft stock to $475 per share.
You will no doubt be shocked to learn that the reason he raised his price target has something to do with artificial intelligence (AI).
Is Microsoft stock a buy?
Specifically, Zino argued that Microsoft's Azure cloud computing division -- already the company's biggest business by both revenues and profits, earning $37.9 billion on $87.9 billion in revenue last year -- grew a further 29% in Q1 2024. Zino says AI work contributed up to 8 percentage points of the growth.
Combined with contributions from the now Microsoft-owned Activision, the analyst forecasts Microsoft will earn $11.74 per share this year ($0.10 ahead of consensus) and grow that between 14% and 15% in each of the next two years.
That's pretty brisk growth for a behemoth like Microsoft. And yet, despite raising his estimates and price target on Microsoft -- indeed, despite predicting the stock will rise 15% this year -- Zino nonetheless rates Microsoft stock a "sell."
Why is that?
It's not entirely clear, but I can at least tell you why I am leery of Microsoft stock. Consider firstly that Microsoft's $82.5 billion in reported net income overstates the cash the company is generating ($67.4 billion in trailing free cash flow [FCF]) by 22%. In fact, it's been three years since Microsoft last generated FCF that matched its reported profits.
Valued on FCF, Microsoft stock trades for a 45x multiple. But Microsoft isn't growing anywhere near quickly enough to justify that valuation. As Zino says, the stock will average only 15% growth over the next few years (and that's faster than other analysts estimate).
Long story short, Microsoft is a very profitable company and is growing quickly for its size. But its FCF is underwhelming and expected to continue to lag reported earnings for years. I'm more inclined to sell it than to buy it.
