It's been about four months since I recommended Microsoft (Nasdaq: MSFT) as a core stock for your portfolio. Time for a quick update.

Things are still looking bright for Mr. Softy. Since November, Microsoft has sold more than 8 million Kinect gaming units and 2 million Windows Phone 7 licenses. These new products are, of course, on top of Microsoft's cash cows: operating systems and business software. Sales of both should accelerate as the economy improves and businesses satisfy pent-up demand.

I tend to focus on valuations when sizing up a company, and things still look great there as well.

Microsoft quick stats

Operations Microsoft is the world's largest software developer, with a near-monopoly on personal computer operating systems and business software.
Recent Price $27.45
Market Cap $233 billion
Trailing P/E Ratio 11.8
Return on Equity, Last 12 Months 46.7%

Source: Yahoo! Finance.

Shares trade at 10.7 times analysts' estimates for 2011 earnings, delivering a 2.3% dividend. Microsoft generated $23 billion of free cash flow over the past 12 months, or a staggering 10% yield on the company's market cap. Put another way, if Microsoft paid out all its free cash flow in the form of dividends, it could pay a 10% yield per year -- and conceivably grow that payout year after year. There simply aren't many other bargains like that in today's market, especially in high-quality businesses like Microsoft.

Then there's the cash hoard. After accounting for debt and long-term investments, it now stands at roughly $40 billion, or nearly $5 per share. Microsoft can do a few different things with this cash. It could pay a one-time special dividend, like it did in 2004. It could add to its already large share buyback program. Or it could make a strategic acquisition. With shares trading at what seem like obviously cheap levels, I'd like to see increased buybacks, and think we very likely will in the year ahead.

Bottom line: Microsoft is doing well, trading cheaply, and possessed of a bright future outlook. As the market surges and bargains dry up, there's still plenty of room for optimism for this company.

Fool contributor Morgan Housel owns shares of Microsoft. Microsoft is a Motley Fool Inside Value pick. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.